Five Reasons Companies Fail at Business Model Innovation

 
October 21st, 2011

My latest column appeared here on the Harvard Business Review site.  images-281

Business model innovation is the new strategic imperative-by now, this is becoming more generally acknowledged. But companies routinely fail at self-reinvention because they are so busy pedaling the bicycle of their current business models they leave no time, attention, or resources to design, prototype, and test new ones. Even where investments are made in innovation, those efforts are focused on new products and services delivered through today’s business models and on making the current models operate more efficiently. These are important to do, without doubt. But they are hardly sufficient in the highly networked 21st century, when business models don’t last as long as they used to and incumbents increasingly face the risk of disruption.

Having watched many companies over the years as they recognize the imperative to change, yet somehow stay stuck in their old grooves, I’ve noted some patterns in their experience. Here, I think, are five important reasons that companies fail at business model innovation:

CEOs don’t really want a new business model.
The most obvious reason companies fail at business model innovation is because CEOs and their senior leadership teams don’t want to explore new business models. They are content with the current one and want everyone in the organization focused on how to improve its performance. The clearest indication that a company and its leaders aren’t interested in business model innovation is when any discussion about emerging business models and disruptive technology is viewed and treated solely as a competitive threat.

Product is king. Nothing else matters.
The lines are blurring between product and service. Business models that are exclusively focused on products are vulnerable to being disrupted by models that blend both product and service to significantly change the value proposition. Think iPod. Apple didn’t bring the first mp3 player to the market. It changed the way we experienced music by delivering on a value proposition that bundled product (iPod) and service (iTunes). Industrial era thinking and NAICS industry codes reinforce the habit of characterizing a business model as being either product or service focused, but this is a false choice constraining business model innovation. Sometimes a proud product heritage can get in the way.

Cannibalization is off the table.
Part of the thinking by line executives in most organizations goes like this: “the last thing we want to do is risk any of our current business. It’s hard enough being at war with the competition in a battle for market share. Why would we want to compete against ourselves?” These sentiments tend to be voiced whenever new business model ideas threaten to cannibalize existing sales. When executives look at new opportunities they see them through the lens of the current business model and view them as competing with the current way the organization creates, delivers, and captures value. Organizations fail at business model innovation because they blindly take cannibalization off the table even if a new business model may have significant upside potential.

ROI hurdles are too aggressive for fledgling models.
There’s no easier way to prevent business model innovation than to assess potential new models using the same economics and financial metrics as projects to improve the performance of the current business model. Financial metrics utilized to assess alternative projects to improve the current business model reflect the cost structure and required returns to sustain and grow in the context of today’s model. New business models are likely to have very different economics and must be assessed in that context. Most new business models will be dismissed out of hand if judged by the economics and constrained by the ROI requirements of the current model. Organizations fail at business model innovation because they apply the wrong financial lens in assessing the attractiveness and feasibility of new business models.

Rogues and renegades get no respect.
Many organizations fail at business model innovation because they shoot their renegades. Or, if they don’t shoot them, they wear them down until they leave. Business model innovators go against the corporate grain. They see entirely new ways to create, deliver, and capture value. If those that are tasked with sustaining and growing today’s business models are allowed to reject those with the perspective and insight to help design the next one, business model innovation efforts will fail. Organizations must learn to celebrate and support people within the organization who are willing to challenge the status quo, to bring totally different perspectives on delivering value to the table, and to take experimental risks to explore new models.

There you have it: my version of the five reasons organizations fail at business model innovation. I’m interested to hear from readers, the managers of the world who fight this battle every day, if I’ve left any other big reasons out. Even more, I’m eager to stop admiring the problems and start exploring ways around them. Business model reinvention is the new imperative for all enterprises who want to stay relevant in a changing world. What can their leaders do to make success more likely?

6 Responses to “Five Reasons Companies Fail at Business Model Innovation”

  1. CoCreatr says:

    Well said, Saul. Asking so directly for any other big reasons – how many businesses and leaders are consciously aware of their business models (yes, plural for most enterprises), as in having modeled each and its key metrics, and using these as maps and dashboards for navigation?

    For those in search of a rapid prototyping manual, try free book preview at http://businessmodelgeneration.com
    Disclosure: one of 470 co-authors, not receiving any proceeds.

  2. Brad Farris says:

    Saul;

    As someone who was part of a “Skunk Works” operation tasked with innovation outside of our core business I can echo all of these challenges. Our core business was very profitable, so almost nothing compared on an ROI basis (especially their first few years) and while our CEO did want to see some different models, no one else did.

    We saw some success when we had unwavering backing from the ownership & CEO, then ignored the critics and embraced our position as renegades. It made us, and our core business colleagues, better.

  3. [...] Saul Kaplan agrees. If Apple had viewed the product in isolation to such an extent that nothing else mattered, the iPod/iTunes proposition would not have happened. This is one of his 5 reasons why business model innovation fails. Interestingly Kaplan takes a much more political rather than process-led approach to the other four. He feels that: [...]

  4. People are conservative. They won’t try something unless you try to convince them, did tons of researchs and tryed it, and it better work the first time or it might not be approved.

  5. Michael Lachapelle says:

    Thank you Saul, very insightful commentary. I’m not sure if it is an extension of the first barrier, or a barrier on its own, but the issue of risk aversion as a deterring inertia has to be considered. This is particularly present in the government context. The mania to avoid potential failure, to avoid ‘embarrassing’ the politician is an overwhelming barrier to innovation.

    Over the past 5 years I led two major initiatives to create innovation in the Canadian Federal government, using Business Model Generation. The first was a success, though in the end the inherent conservatism made them stop short of radical change. The second failed, in a large part because of the fear and reluctance to accept the inherent risk in innovation, controlling it by reducing the change to process improvement and better standardization. The difference between these projects was a committed senior leader who recognized the impact of change and tried to manage the risk aversion.

    In retrospect one of the things I would have done differently is introduce the ideas and methods in The Other Side of Innovation by Govindarajan & Trimble. It is important to understand the difference and conflict between performance and innovation.Particularly in problems 4 & 5 you mention in the article.

  6. Jonathan Feldman says:

    Cannibalization used to be called “diversification” or in some cases “conversion.” If you move into a new product or market line, and you are very successful, then that is hardly cannibalization. New product lines are not simply at the expense of existing product lines. You did not write that, but if you are looking for a universal model, you have to consider all the possibilities.

Leave a Reply