Key lessons for business leaders about optimizing business model innovation with examples of Amazon's successful approach.
Amidst the rapid pace and ever-changing landscape of today’s business climate, companies are seeking every avenue possible to stay one step ahead of the competition.
Amazon is at the top of its game when it comes to innovating.
They were among the first to offer free shipping to members. Because of Amazon, shipping times longer than two days are now outdated and not competitive.
MBA@Syracuse, Whitman’s online MBA program, created this infographic to show just how far innovations to Amazon’s supply chain have taken them.
Changing the shipping landscape isn’t the only way Amazon is beating out other e-commerce options. Here, we’ll take a look at how this company is innovating to try to beat out its competitors.
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The Nuts and Bolts of BMI
At its core, business model innovation is nothing new. In fact, it’s the type of gritty experimentation that fuels many new startups and entrepreneurial endeavors but is typically trumped by the needs of the brand in larger organizations. However, as Keary Crawford the co-author of "Growth Thinking: Building the New Growth Strategy Enterprise" notes, BMI must get the attention it deserves above products, services or brands if a business expects to maintain a competitive advantage.
“Over time, the companies that fail to reinvent their business models to challenge outmoded assumptions about their businesses, renew their customer value propositions and change the competitive dynamics of their industries in their favor can quickly become vulnerable to commoditization, obsolescence or business failure,” Crawford writes.
Unfortunately, Crawford says that although 50 percent of executives say they believe that BMI is more important than innovations in products or services, less than 10 percent of investment in innovation at global companies is focused on BMI. It’s a gap that can create some major missed growth opportunities both in terms of incremental growth from making the most of existing businesses, and transformational growth from the creation of entirely new sources of revenue and value.
As Crawford notes, “Rather than simply figuring out more efficient ways to operate in existing markets, the components of business models can, individually or collectively, be reinvented to create entirely new markets, new opportunities and structural competitive advantages.”
Two more business experts who tout the benefits of BMI are Karan Girotra and Serguei Netessine, the co-authors of "The Risk-Driven Business Model: Four Questions That Will Define Your Company." In an article for Harvard Business Review, they highlight how this type of innovative approach can offer distinct advantages: “Business model innovation is a wonderful thing. At its simplest, it demands neither new technologies nor the creation of brand-new markets: It’s about delivering existing products that are produced by existing technologies to existing markets.”
However, they say that a major challenge in business model innovation is being able to define what’s actually involved in achieving it, which is why a framework for identifying opportunities is key to supporting a systematic approach. In their approach, such a framework is built on the premise that any business model is “essentially a set of key decisions that collectively determine how a business earns its revenue, incurs its costs and manages its risks.” As a result, innovations to the model are related to changes to each of those decisions.
How Amazon Counts on BMI for Success
As all of these experts note, one of Amazon’s most effective and valuable business attributes is the ability to innovate its business model in an agile manner in order to capitalize on new trends and technologies. Perhaps that’s why or because CEO Jeff Bezos is known for his ability to experiment his way to a ridiculous level of enterprise success.
In an interview for a piece in Fortune by Hal Gregersen, the executive director of the MIT Leadership Center, Bezos says experimentation plays a crucial role at the online-everything giant: “Experiments are key to innovation because they rarely turn out as you expect and you learn so much. We’ve tried to reduce the cost of doing experiments so that we can do more of them. If you can increase the number of experiments you try from a hundred to a thousand, you dramatically increase the number of innovations you produce.”
In her evaluation of Amazon’s use of BMI, Crawford highlights the four key components that she says are needed for effective business model innovation, which she refers to as an “Eliminate, Raise, Create, Reduce framework.” She lists specific examples of how Amazon implements them:
- Eliminate: Which elements are taken for granted in your business and can be eliminated? Amazon eliminated the traditional retail distribution channel and developed direct relationships with suppliers while simultaneously making the most of new technologies, which created a new avenue for the customer.
- Raise: Which elements can be raised above the industry’s standard? Amazon raised the customer experience bar by “recognizing the potential to transform the way we shop by building the next generation platform and infrastructure that gives customers unprecedented choice, scope and value.”
- Create: Which elements can be created that the industry has never offered? The company’s new Amazon Web Service is built from its core technology infrastructure and creates a new level of accessible and affordable cloud computing.
- Reduce: Which elements can be reduced below the industry standard? Amazon has created a bit of controversy by electing to reduce its short-term profitability in exchange for long-term growth.
In their approach, Girotra and Netessine outline four “paths” to business model innovation that include key questions with specific components and considerations for each:
- What mix of products or services should you offer?
- When should you make your key decisions?
- Who are the best decision-makers?
- Why do key decision-makers choose as they do?
In Amazon’s case, they provide a timeline from 1996 through 2010 to show how the company has incorporated each of these questions and related components into its business model innovation efforts from recruiting distributors and publishers to carry slow-moving inventory instead of stocking the books itself in 1996, to focusing narrowly on specific products like baby consumables and shoes with the acquisitions of Diapers.com and Zappos from 2008 to 2010.
Lessons for Your Business
With the level of success that Amazon has achieved, its enduring reliance on experimentation and innovation is an obviously effective approach. By implementing the various strategies that these experts recommend for business model innovation, you can better lead your company to a more profitable future, as well. As Gregersen notes, “Experimenting is the ultimate way to transform an idea into reality it’s the mechanism by which great new insights translate into new markets.”