Innovation is a critical source of competitive advantage and certainly deserves the attention it receives. But innovation is also difficult to manage and something many organisations struggle to repeat (if they were lucky enough to experience it once). Recognized innovators are widely admired for their achievements but as every business leader knows, the pursuit of innovation is exceptionally challenging even as it is entirely necessary.

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The roots of the problem lie in the fact that innovation takes place at the crossroads of two critical uncertainties: uncertainty about the future, and uncertainty about what will be best for the business.

Given these issues, executives face two key questions:

  • First, what innovations should our organisation be pursuing?
  • And second, how should we create them?

We respond by noting that among the four types of innovation that any company could pursue, business model innovation should be highly attractive and pursued aggressively. Why? Because these innovators are earning very attractive returns on capital, and finding new market opportunities that others have overlooked. But business model innovation is also widely misunderstood, and consequently few organisations are reaping the significant benefits that can come from doing it well.

Why is business model innovation important for every company? How can organisations develop breakthrough business models of their own?

Four Types of Innovation

Organisations typically must allocate their innovation investments among four types of innovation: incremental, breakthrough, new venture, and business model.

  • The purpose of incremental innovation is to maintain market share. This is a maintenance strategy and necessary for any organisation to ‘stay in the game.’ But incremental innovation rarely confers much of an advantage and is not sufficient to support growth.
  • The search for breakthroughs offers a shot at stardom, but as they are quite rare, pursuing breakthroughs is recognised to be a high risk approach.
  • Successful new ventures can position a company for the very long term, but they are also high risk, capital intensive, and for good reasons they are rarely attempted.
  • In today’s business environment, this leaves the fourth option as the most attractive. Business model innovation can be the most cost-effective form of innovation, and for many companies it can also be the most promising route to success.

Recent research by IBM has shown that business model innovators are earning the most attractive returns on innovation investment, and also achieving the best rates of growth. In fact, if you look at the most successful and admired companies of the last twenty years, you see that most of them have focused on developing innovative business models.

What company would not want to be included on this list of business model innovators? Amazon, Apple, Facebook, Uber, Alibaba, Costco, FedEx, Google, Ikea, Southwest Airlines, Starbucks, Wal-Mart, and Zara are 10 of the world’s most successful companies, and business model innovation has been the key to the success of each one.

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