In the innovation management literature, “business model innovation” is the new buzzword. What is it, how is it different from other types of innovation, and is it applicable to the healthcare and legal industries?
Business model innovation defined
Perhaps it’s easiest to understand what business model innovation entails using an example. Amazon sells books (products) and gets these books from publishers to customers (process). What differentiates Amazon from a bookstore is its online business model. Business model innovation doesn’t necessarily involve novel products or services, but it does involves a novel approach to how the business runs. Other famous examples of business model innovations are Dell’s computers and Apple’s iTunes.
Less risk, more impact
The examples given—Dell, Apple, Amazon—illustrate the disruptive potential of business model innovation. At the same time they entailed few risks, as people are known to buy computers, music and books, and it costs less to sell existing products than to develop new ones.
Opportunities for business model innovation
In the healthcare and legal markets there are plenty of opportunities for business model innovation. In health care, the traditional model is fee-for-service—a model in which a hospital or clinic gets paid more when a patient receives more treatment. Not an ideal model for containing costs, nor always the best for patients who may receive treatments or tests they don’t need. In the legal profession, the business model is based on billable hours. This is not ideal either, as it makes it difficult to control costs for legal services since efficiency is not rewarded.
Rethinking an entire business model is often not the first thing on a manager’s mind when responding to a crisis, operating in tough economic times or taking advantage of new opportunities. Changing a business model requires systems and holistic thinking, as it will impact the entire organization. It is therefore not surprising that business model design often goes unchallenged, with business model innovation opportunities left on the table.
Applying business model innovation
As with most innovations, you need to start with the customer’s needs.
- What mix of products or services should your firm offer? What are the tasks that your customers are trying to accomplish?
- When do customers need to decide whether or not to purchase your product or service, and when do you have to act to deliver them? You reduce business risk anytime your customer decides first, before you have to take action.
- Who is making the decisions? Often, senior management is ill-equipped to make decisions in isolation, simply because they don’t have access to all the information. Who in the organization is best informed? You may have to look outside the organization for the best information. For instance, an insurance company probably knows more about a patient’s healthcare consumption than any healthcare provider. How can all the pieces of potentially valuable information be aggregated and leveraged to strengthen the decision-making process?
- Why do key decision-makers act as they do? Is it possible to change the decision-maker’s motivation? For example, in health care patients are the ultimate decision-makers. Motivating them to participate in preventive care and make healthier lifestyle choices will be essential to changing the paradigm in health care from treating the ill to preventing people from becoming ill. Performance-based contracts could be useful here, as they are typically used to align objectives between parties trying to create value together.
Interested in learning more about business model innovation and how it applies to your business? Please contact us at: info “at” organizing4innovation “dot” com, or visit our website for more information: www.organizing4innovation.com.
Giotra and Netessine, 2014, Four Path to business Model Innovation, Harvard Business Review
Amit and Zott, 2012, Creating Value Through Business Model Innovation, MIT Sloan Management Review