How to Identify New Business Models

Systematically exploring alternative approaches to value creation can allow companies to find new opportunities for growth.

Organizations traditionally pursue growth via one or more of three broad paths:

  • They invest heavily in product development so they can produce new and better offerings.
  • They develop deep consumer insights in order to offer new and better ways to satisfy customers’ needs.
  • They concentrate on strategy formulation to grow by acquisition or by moving into new or adjacent markets.
    Recently, a fourth path has emerged: the pursuit of growth through the methodical examination of alternative business models.

Research conducted in the last 10 years has established a link between business model innovation and value creation. To our minds, this research points to the need for organizations to build a competency in business model innovation.

Our goal is to demonstrate how an organization’s ability to methodically and routinely examine multiple business model alternatives — in other words, by treating the business model as a variable and not a constant — can serve as a critical enabler of growth, allowing executives to anticipate, adjust to and capitalize on new technologies or customer insights.

What is a business model?

For our purposes, we will explore the concept of a business model by addressing several core questions that the majority of business model researchers use in their models:

  • Who is the target customer?
  • What need is met for the customer?
  • What offering will we provide to address that need?
  • How does the customer gain access to that offering?
  • What role will our business play in providing the offering?
  • How will our business earn a profit?

Starting the process

The first step in the business model exploration process is to create a template to examine possible alternative answers to the questions above. The questions that help to shape a business model represent a series of decisions, each of which has a set of possible outcomes. Our template lays out various possible outcomes within the business model structure. Selecting one possibility from each category and then linking them together forms one potential new way to proceed. And, of course, selecting different combinations creates other possible outcomes.

To see how this works, consider how an airline might use the template to generate alternative business models. Currently, airlines serve a range of customers with the same basic model. For example, regardless of whether the customer is going on vacation with her family, traveling on business or responding to an emergency, airlines use the standard pay-per-seat model with which we are all familiar. Minor levels of customization exist — for example, larger seats and priority boarding for those who pay for them — but the core model is the same for all.

To explore business model innovation, an airline could start by picking a specific customer group and then beginning to explore potential options other than its current model. Answers to the question “How does the customer gain access to the offering?” (which is essentially the same as asking “How will we sell it?”) could include “Through travel agents” or “Through online websites” or “Through self-service kiosks” or “As part of partnerships.” As for where on the value chain the airline might operate, it could be the service provider, but it might also be a wholesaler selling off excess capacity to reduce unprofitable flights. Various profit models would likely start with the traditional pay-per-seat but might expand to include subscription models. The offering itself might be a premium seat, a low-cost seat or maybe even fractional ownership of a plane or chartered use of an aircraft. We experimented with “What we sell” for an airline to show how changing just one variable can result in a substantially different business.

This process has the potential to uncover combinations common in other industries but not in your own. In fact, applying analogies from other industries (for example, what if a company became the NetJets of agricultural equipment or the Dell of automobiles?) can be fruitful. It may also highlight links that create a “systemic” level of competitive advantage in the business concept — much as Apple did with the agreements it made with record labels to distribute songs through its iTunes online music site.

A quick run-through of simple combinations of high-level strategic questions can produce a wide range of potential business models. But each of the questions could be examined in more detail in a systematic way to yield deeper insight into some specific aspect of the business. For example, rather than brainstorming various alternatives for the “What we sell” category, a company could break the category down into its constituent parts and ask a series of additional questions such as:

  • Should we sell a product or a service?
  • Should it be standard or customizable?
  • Will its benefits be tangible or intangible?
  • Will we sell a generic or branded offering?
  • Should it be a durable or a consumable?

We have often found it useful to visualize such choices as switches, or levers, which can be flipped one way or the other. You could engage in a similar exercise to systematically explore potential variations in the way a customer might gain access to an offering or the way a customer might pay for it.

The bottom line

By engaging in business model experimentation with a small, focused team, companies can accomplish three important goals. First, they can understand the implications of different business models and make clearer, better informed decisions about where and how they want to compete. Second, they can identify the business models that will create the most value for customers and themselves and appropriately leverage their existing resources. And third, they can use business model innovation to extract the maximum potential from other growth-focused activities — their technical R&D, customer insight and strategic development efforts. Given the high potential of business model innovation and how few companies have mastered it, we see business model experimentation as a potent source of competitive advantage.

This article is adapted from “How to Identify New Business Models” by Joseph V. Sinfield, Edward Calder, Bernard McConnell and Steve Colson, which appeared in the Winter 2012 issue of MIT Sloan Management Review.