Using Business Model Innovation to Reinvent the Core

Using Business Model Innovation to Reinvent the Core

          
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Using Business Model Innovation to Reinvent the Core

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  • When Traditional Levers Fall Short: Three Pitfalls

    Companies have historically relied on a handful of tried-and-true tools to drive organic growth within the core. Three of the most common are product enhancements, new-product introductions, and pricing strategies such as discounts and promotions. While these levers should still play important roles in a company’s overall growth tool kit, they may not be enough to stimulate strong core growth. Most large companies have operated in the same core business for years—or even decades—and these levers inevitably hit a point of diminishing returns. As customer needs change and new competitors emerge, incremental approaches may not be enough to sustain a growth trajectory.

    Companies facing these challenges tend to act in similar ways. We have synthesized these into the following three pitfalls, each of which corresponds to a traditional growth lever. (See Exhibit 1.)

    exhibit
    • Just add a blade. Incremental product enhancements—such as improving a razor by adding another blade—stop producing results when customers derive most of the value from a service, experience, or outcome related to the product and not just from the product itself. When this is the case, companies that focus on a product-based value proposition will limit their own potential, make innovation investments that are not valued by customers, and risk becoming obsolete because the true customer need lies outside what the product can provide. Until very recently, pharmaceutical companies faced this challenge after developing better drugs that targeted only a small portion of the overall treatment pathway without addressing broader health and wellness needs.
    • Go out on a limb. When companies make innovative changes to a product or service without adjusting its supporting partnerships, capabilities, and distribution channels, the results can be disappointing. Even breakthrough innovations—with fundamentally different customer-value propositions—often fail if they aren’t accompanied by the right operating model. An extreme example is LA Gear, a shoe brand that was popular in the 1980s and 1990s. The company changed its value proposition from “fashion” to “performance” to enter the men’s basketball shoe market, but it failed to enhance its suppliers’ manufacturing capabilities accordingly. The shoes literally fell apart on national TV.
    • Chase volume. Many companies are tempted to reduce prices or find other creative discounting approaches in the hope of driving increased sales volumes. However, price reductions alone—without corresponding changes to other elements of the business model—can quickly lead to significant margin erosion. Premium offerings, traditional revenue models, and a high cost structure can all limit companies’ ability to reduce prices profitably. Retailers frequently suffer from this pitfall when they discount products heavily; they see an initial increase in store traffic, but ultimately margins plummet.

    How can companies pursue the same objectives of traditional growth levers—enhancing customer value, developing a fundamentally new value proposition, and lowering the price point—but avoid the associated pitfalls?

    The answer for many has been to move beyond these traditional tools and consider innovation across the entire business model. To be sure, BMI is less familiar than traditional growth levers are and can be perceived as riskier. But as the examples below illustrate, the returns more than outweigh the risks.