Business Model Innovation Capability: A Game Changer for Sustaining a Firm’s Edge

Abstract

Developing business model innovation capability is a game changer which allows companies to stay at the top of their game in a rapidly changing world. To maintain their firm’s competitive edge, managers must continuously evaluate the extent to which there is a fit between their company’s business model, market needs, and the external environment. In this chapter, we are proposing a three-phase, interrelated, and mutually reinforcing process framework for building a business model innovation capability. When carried out repeatedly and mindfully over multiple business model innovation initiatives, the process enables managers to build their firm’s business model innovation capability. Our chapter highlights the strategic role of design as a cornerstone for building a firm-level capability, not just as a practical tool for innovation. It also provides practitioners with an actionable framework for business model innovation.

From Isolated Business Model Innovation to BMI Capability

Business model innovation (BMI), at its heart, is a design task (Amit & Zott, 2021; Zott & Amit, 2015). It has become the focus of senior managers’ efforts to sustain the competitiveness and prosperity of their companies. For example, faced with competition from innovative business models in their industries, often from digital new entrants such as Uber or AirBnB, “four-fifths of Chief Company Officers are experimenting with alternative business models or thinking to do so (IBM, 2015, p. 23).” Aware of the ongoing threats to their businesses, C-level executives are motivated to innovate their business models in a continuous and systematic manner. Yet, how can their firms develop capabilities that enable the continuous design of BMI?

This is an important strategy issue. Business model design requires managers to define precisely how the company is embedded in its “ecology”—that is, in the multiple networks of firms, institutions, technologies, and customers that surround it—thereby determining not only the possible partners that can help it co-create value, but also its likely competitors. The business model is thus one of the most fundamental strategic design tasks that CEOs and general managers must carry out, and a task that they may have to reconsider periodically given the speed of change in their respective businesses and industries.

Scholars, too, are interested in this issue and are turning their attention from firms’ isolated attempts at BMI (e.g., Cozzolino et al., 2018; McDonald & Eisenhardt, 2020; Peprah et al., 2022) to BMI as an ongoing stream of innovations (Snihur & Zott, 2020; Warner & Wägner, 2019), and in fact, as an organizational capability.

Current Thinking on Business Models

Building on prior research (Amit & Zott, 2001; Zott & Amit, 2010), we conceive of the business model as a value-centered activity system that is designed and enabled by a focal firm in order to meet perceived market needs. The key dimensions of a business model are: (1) its content (i.e., what activities are enabled by the business model); (2) its structure (i.e., how the activities are linked in the business model); (3) its governance (i.e., who performs the activities that are enabled by the business model—which activities are performed by the focal firm versus those performed by partners, suppliers, or customers); and (4) its value logic (i.e., why the business model creates value and why it enhances value appropriation) (Amit & Zott, 2001; Zott & Amit, 2007, 2008, 2010). In short, the business model is about the what, how, who, and why of the activity system orchestrated by a focal firm.

We consider a business model design of an incumbent firm to be innovative when the firm changes its activity system so that the new system is novel for the firm and possibly also in the product-market spaces in which it competes (Amit & Zott, 2012). This may imply a significant strategic shift, in particular when the new business model creates new sources of revenues, or when it redefines the rules of competition for an entire industry (Visnjic Kastalli et al., 2013). To cite some well-documented examples, by leveraging connectivity, DELL implemented a customer-driven, build-to-order business model that replaced the traditional build-to-stock model of selling computers through retail stores. And when Apple introduced the iPhone in 2007 and subsequently the App store, it revolutionized the smartphone handset industry, representing a profound transformation. Apple’s business model shifted from being a product-centric firm—developing, manufacturing, and marketing stylish and expensive bundled hardware and software—into a powerful digital platform, based on the iOS operating system. The shift enabled Apple to create more value for all business model stakeholders, such as app developers, telecommunication companies that operate wireless networks around the world, and of course users, while capitalizing on the use of its hardware and thereby substantially enhancing its own market value.

In addition to complementing a firm’s product-market strategy (Zott & Amit, 2008), what makes business model innovation potentially powerful is that competitors often find it more challenging to imitate or replicate a novel business model than to copy a single novel product or process, due to the systemic nature of business model innovation and its intangible and tacit characteristics. Although it is relatively easy to undermine and erode the returns of product or process innovation, innovation at the level of the business model can be the source of sustainable competitive advantage. Further, due to technological changes as well as changes in consumer preferences market conditions change over time which may call for changes in the firm’s business model. The questions that managers may need to ask in this context include: Should we develop a business model innovation capability? And if so, how can we do it? The latter question constitutes the focal research question of this chapter.

Two streams of academic research seem particularly pertinent for informing this research question: first, the literature on capability development, and second, the literature on business model innovation. Surprisingly, relatively few studies have examined their intersection and proposed specific processes or frameworks for BMI capability development. This is the gap on which the current study focuses.

In the first literature stream, researchers have examined primarily the role of knowledge articulation and codification for capability development (Zollo, 1998; Zollo & Winter, 2002). Although great strides have been made to explain capability development, there are gaps in our knowledge, in particular regarding the development of dynamic capabilities (Romme et al., 2010). In the second literature stream, much research has focused on the development of innovative business models and its associated outcomes (Foss & Saebi, 2017) yet researchers have only sporadically examined the capacity of firms to do this reliably and repeatedly. A business model innovation capability involves ongoing design and testing of business model improvements (Mitchell & Bruckner Coles, 2004; Warner & Wägner, 2019), as well as systematic identification of value creation potential and associated risks (Euchner & Ganguly, 2014). Such a capability also likely involves senior managers’ novelty orientation, which refers to cognitive practices such as industry-spanning search and complex system thinking (Snihur & Zott, 2020). However, little is known about the specific processes by which a business model innovation capability can be established. Since the capacity to innovate the business model can be conceptualized as a dynamic capability (Amit & Zott, 2016), the gaps in both literature streams converge.

In this chapter, we seek to advance the literature by focusing on the question of how to develop a capability for BMI and by providing an actionable process framework for manager.¹ Anchored in the received strategic management literature and in substantial fieldwork on business model innovation in established firms, we propose a normative, three-phase process framework for building a business model innovation capability (see Fig. 2.1). The first phase in our framework requires managers to adopt a business model perspective in order to complement their typical focus on products and services, to understand the strengths and weaknesses of their current business models, and to grasp the key dimensions along which they can be innovated. We call this the “awareness stage.” In a second phase, managers—as business model innovation designers—need to frame the design problem that they are facing, for example, by calibrating their aspirations with technological, financial, and human capital feasibility. We call this the “framing stage.” In the third phase, managers need to carry out the creative business model (re-)design and implementation work in a well-defined design process. We call this the “design stage.”

Fig. 2.1

(Note The various arrows indicate a highly iterative [as opposed to linear] process)

Framework for developing business model innovation capability

The key idea advanced in this chapter is that building a business model innovation capability requires an initial spark provided in Phase One (awareness stage), and then gradual development through iterative cycling between Phases Two (framing stage) and Three (design stage) across various business model innovation initiatives. Creating awareness (Phase One) helps framing (Phase Two) and vice versa. Enhanced awareness and framing then guide the design effort (Phase Three), which in turn heightens awareness of business model innovation (Phase One) and sharpens attention to key boundary choices (Phase Two). These dynamic loops deepen managers’ awareness of the design tasks at hand and allow them to develop their skills, build the mindset, and refine the processes that form the basis of an organizational capability that can be defined as “the capacity to perform a particular activity in a reliable and at least minimally satisfactory manner” (Helfat & Winter, 2011). Thus, when carried out repeatedly and mindfully over multiple business model innovation initiatives, a firm can build a business model innovation capability, which can even be viewed as a dynamic capability (Amit & Zott, 2016; Teece, 2007).

Toward a Framework for BMI Capability Development

In this chapter, we conceptually combine knowledge from academic research on business model design and innovation to develop an understanding of how business models can help explain total value creation and value capture by firms beyond that which is explained by products, services, and operational processes. Specifically, we apply the business model perspective to established firms, combine it with a dynamic design process perspective, and illustrate and complement the derived conceptual framework with data and insights on business model design in established firms.

Our data were obtained from two sources. The first data source is in-depth case studies, based on actual project experience in business model innovation. The second data source consists of a series of surveys conducted by IBM between 2004 and 2015 and submitted to C-level executives, for which over 15,000 responses were collected and analyzed. Participants in IBMs “C-suite Study” were a balanced mix of six C-suite roles. Data collection was designed by country in order to obtain participation that was proportional to that country’s share of global GDP. The number of interviews and their distribution across regions and across company sizes ensured an unbiased sample.²

The Case of SEC. We illustrate our framework throughout this chapter by way of an anonymized yet real example: Ship Engine Corporation (SEC). SEC is a global company headquartered in Scandinavia that produces and sells diesel engines for both bigger yachts and smaller sea-going vessels. SEC has a long heritage of developing state-of-the-art engines and is commonly viewed as the quality leader in its market segment. SEC realizes its revenues by selling the engines; in this industry, maintenance and services activities are typically performed by smaller third-party contractors.

Phase One: Raising Awareness of Business Model Innovation

Business model innovation (BMI) is realized through a change at the activity-system level, which in turn results from changes to any one of its key dimensions (Amit & Zott, 2012). It complements more conventional forms of innovation such as product innovation; it is a new level of innovation and a distinct new source of value creation beyond products, services, and processes (Zott & Amit, 2007, 2008). As such, it is not as easy to comprehend and relate to as other, more conventional forms of innovation. Therefore, in order to harness its full potential, managers need to raise their own and organization members’ awareness of the power of BMI. This means that managers or employees who intend or need to innovate should no longer focus solely on their firms’ products and services or on management processes, but also on creative ways in which the firm engages with its stakeholders to conceive, produce, deliver, and consume the firm’s products and services. In short, managers and employees involved in their firms’ innovation efforts should adopt a business model mindset and embrace the possibility that innovation can happen at the business model level—in addition to innovation at the product/service level.

Such a shift in mindset from the product to the business model level of analysis can be facilitated by strong awareness-creating or enhancing communication from top management on the importance of the topic, as well as through awareness-creating or enhancing workshops that explain and illustrate to managers and employees the underlying concepts and that provide clarity on the competitive ecosystem of the firm supported by examples.

The Case of SEC. Consider the example of SEC. The firm introduced sensors on their diesel engines, which represented a significant investment in developing and building a data platform. Through a gateway, the sensors continuously provided rich data to SEC. Following the investment, the CEO challenged his management team by pointing out that, “It is great to have all these data, but how are we going to monetize our sensor-based platform? What are we going to do with this platform from a business perspective? I want us to think more fundamentally about how this can lead to a new business model for SEC and help us grow our market share significantly.” The challenging words from the CEO sharpened the focus of SEC’s managers and increased their awareness of the nature of the task at hand: business model innovation that builds on and enhances the products, processes, and technological innovations of SEC.

Types of BMI. Changes to one or more of the key dimensions of a business model, and any crucial supporting decisions such as the choice of revenue models that serve to monetize the firm’s business model, can result in various types of BMI that differ in their strategic implications for the innovating firm (Giesen et al., 2007), such as “Industry Model Innovation,” “Enterprise Model Innovation,” and “Revenue Model Innovation.” Awareness of these concepts can further enhance the manager’s effectiveness in designing a new business model.

First, innovation in the structure (how) and content (what) of the business model can help a firm move into new industries, redefine an existing industry, or create an entirely new one. We therefore refer to this type of business model innovation as Industry Model Innovation (IMI). For example, with the introduction of the iPod and iTunes, Apple as a device manufacturer successfully entered the music industry. IMI is often considered a means of disruption of the established order, as almost 30% of CEOs state they are “changing their industry models to be more disruptive” (IBM, 2008, p. 28). But decision makers also admit that IMI “is tough to do” (IBM, 2008, p. 52).

Second, innovation regarding the who of the business model (e.g., decisions regarding with whom to partner) can change the role a company plays in its value network. We refer to this type of business model innovation as Enterprise Model Innovation (EMI). As an example, Procter & Gamble wanted to be more effective with their R&D and therefore set up the “Connect and Develop” R&D program, which transformed the company’s approach to R&D by shifting it from an inward orientation to intensive partnerships with external scientists. And Illy Café, the famous Italian coffee manufacturer, has become the “spider in the web” in a value network in which they connect and create value for coffee growers, coffee-maker manufacturers, cup manufacturers, cafes, and end consumers. Data suggest that EMI is an attractive and increasingly important option for senior managers because “more than 40% are changing their business models to be more collaborative” (IBM, 2008, p. 7), and “more than two thirds of the CEOs are looking for partnering and thereby innovate the enterprise model” (IBM, 2012, p. 23). Moreover, 90% of C-level executives stated that they wanted to work on open and platform-oriented business models, and 70% of them expected to expand their partner network (IBM, 2015, pp. 23, 9).

Third, a company may also choose to innovate its revenue model, which implies reconfiguring its value proposition and its pricing strategy. We refer to this type of innovation as Revenue Model Innovation (RMI). An example of RMI is Gillette, the forefather of the idea of giving the razor away cheaply and selling the razor blades expensively. Their so-called razor and blade revenue model was subsequently copied many times (e.g., by inkjet manufacturers). RMI is often associated with changes to the firm’s activity system. For example, Netflix supported its RMI (vis-à-vis the then-industry-leader Blockbuster) of DVD rentals for a monthly subscription fee with a new business model structure that was geared initially toward postal delivery of DVDs.

Phase Two: Framing the Business Model Innovation Process

Next, we turn our attention to the basic parameters that managers need to consider to frame and guide the (re-)design of their business models, especially in light of important recent technological trends such as the rapid emergence of AI that support the development of new, innovative models. These parameters represent key choices that define the boundaries of the ensuing BMI process.

Anchored in the received literature and field experience, we point to five key choices that are particularly relevant in the context of framing the design of innovative business models: direction, goals, templates, stakeholders, and constraints (Amit & Zott, 2015, 2021).³ Mindful consideration of these five key choices helps managers prepare the organization for the business model innovation process. Figure 2.2 depicts these choices that managers need to contemplate and on which they may wish to reflect in order to frame their business model design process. Together, these aspects will ultimately shape the outcome (in terms of the what, how, who, and why) of the BMI effort.

Fig. 2.2

(Note The five outer arrows are positioned randomly and have an equal impact on the various elements of the business model design [What, How, Who, Why])

Key Framing issues influencing business model (re-)design

The five parameters could interact with each other. For example, if the choice of direction is top-down, then constraints could be introduced later, in order to give senior managers the chance to detach themselves from their often deeply ingrained mindsets (if that were the case).

The Case of SEC. Consider again the example of SEC. Based on the challenging questions from the CEO about a possible new business model for the company, a small project team was formed, which consisted of the management team of the involved business units—the chief digital officer, the chief technology officer, and the chief marketing officer—supported by a few people from the corporate strategy department. SEC set their project up as a top-down driven project (direction), led by the business units with critical involvement from technology and marketing. The CEO did not formulate any specific constraints for the team; the broad goal was to identify new business opportunities. The team was open to considering other templates (e.g., business models from services industries) and the possible involvement of new stakeholders (e.g., weather data providers).

Direction

The direction of the business model design process can be top-down, bottom-up, or a mix of the two. A top-down process is anchored in engaging the CEO and the Top Management Team (TMT). If the starting point of the design process is at the very top of the organizational hierarchy, the sequencing of the phases in the ensuing design process (see below: Phase Three) could be different than when the starting point is situated lower, as in the case of a process engaging middle managers. In the top-down case, the generation of ideas is likely to occur early in the process, especially if the goal is highly ambitious (e.g., to come up with a completely disruptive new business model). The CEO and TMT might then wish to adopt a lean start-up approach to playfully invent and test their “next, big, new, business model” idea (Zott & Amit, 2024). A bottom-up process, by contrast, is more democratic in the sense that it is team-based, interdisciplinary, and cuts through organizational hierarchies and across organizational functions, following a more human-centered, “design-thinking” philosophy. It may also involve outsiders such as customers or strategic partners. Nevertheless, in order to move such a project forward, it will need to have the blessing and support of the top management team.

Goals

Boland and Collopy (2004) point out that design problems must have goals, else they are not viable design projects. The goals of a business model (re-)design project refer to the creation and/or capture of enhanced value, for example, through the creation of new and inspiring customer experiences or through the creation of an innovative, scalable, and robust business model that will not invoke retaliation by competitors. Goals require a high level of awareness of the design task at hand and are an important framing issue: If aspirations are high, and if they are supported by the CEO and the TMT, then the BMI design project is more likely to be taken seriously by the rest of the organization, as well as by the other business model stakeholders (e.g., strategic partners, suppliers). It is also more likely to lead to fundamental, perhaps even radical, change.

The Case of SEC. As an example, the SEC CEO stated to his management team that he wished to look for the next disruptive business model. This clearly set high expectations for the design process; improving the business model incrementally was no longer an option for this company.

Templates

Templates refer to business model blueprints from which managers draw inspiration and from which they can mindfully borrow. Mindfulness here denotes a state of active awareness and refers to the cognitive aspects of business model design—for example, recognition in real time that one is using a design template (Amit & Zott, 2015). These blueprints could be the business models of any incumbent firms (from within the same or different industries), or generic business model archetypes (e.g., “market-platform operator,” “servitizing manufacturer,” “recycling alliance”) (Kortmann & Piller, 2016). This framing issue refers to the extent to which managers as designers “look outside” (i.e., admit external stimuli) for inspiration as part of their business model (re-)design efforts. The kinds of stimuli they consider will influence their design journey (Snihur & Zott, 2020). An example is Amazon Studios, which adopted from other industries the concept of “involvement of the crowd” to review and judge film scripts. Emerging Generative Artificial Intelligence (AI) technologies can be helpful in identifying a broad range of templates that are deployed across industries (Ferràs-Hernández et al., 2023; Sjödin et al., 2021).

Stakeholders

Stakeholders are external partners who may play an active role both in the design process and in the resulting business model (Boland & Collopy, 2004). The degree of openness on the part of the business model designer(s) to collaborate with stakeholders from a range of industries represents an important framing issue because it influences the range of available design options. An example is a global transportation company that held workshops for envisioning new business models, to which it invited external stakeholders such as its direct-equipment customers, logistics partners, end-users, and suppliers. The goal of the exercise was to rebuild a joint business model, leading to new and deeper partnerships and eventually the creation of an entirely new transportation ecosystem.

Constraints

The fifth design parameter to be considered by business model designers is constraints (Boland & Collopy, 2004). The importance of this design parameter is summarized by Brown, who stated that, “the willing and even enthusiastic acceptance of competing constraints is the foundation of design thinking” (Brown, 2009, p. 19). Constraints define the boundaries of a business model (re-)design effort, and they can also serve as stimuli to the invention of new approaches. Constraints are either external (e.g., regulatory, technological constraints) or internal (e.g., resource constraints). The questions a design team needs to contemplate include at which stage of the design process to take constraints into account, and whether it is possible to turn these constraints into opportunities. If managers consider constraints too early in the process, they might impose unnecessary limitations that could prevent the development of creative, “out of the box” designs. Uber, for instance, would never have come into existence if the prevailing taxi laws had been considered as an important element from the outset. On the other hand, considering constraints too late might impose costs and impede implementation.

Phase Three: Designing Innovative Business Models

Following the design literature that partly documents the well-established practices of design firms such as IDEO, design as a process broadly consists of several phases that are linked iteratively (Beckman & Barry, 2007; Bhavani & Sosa, 2008; Boland & Collopy, 2004; Brown, 2009). The design process is typically anchored in human-centered observation, which is followed by a synthesis of insights and the generation of ideas, which are then refined and implemented. We use these phases of the design process as an organizing frame to explain how innovative business models can be designed, and especially how considering the digitization trends and the above-mentioned design parameters (framing issues) influences the likelihood of developing powerful, robust, and value-creating new business models (Zott & Amit, 2015).

Grounding BMI in Careful Observation of Stakeholder Behaviors and Needs

Sound business model design should be grounded in a deep understanding of the current business model and the problems associated with it (e.g., competitive threats, dissatisfied customers, untapped market needs, or vulnerabilities). A careful documentation and analysis of the current model is not a straightforward exercise, however, because few managers engage in such analysis, let alone on a regular basis, partly because they are not equipped with the relevant concepts, tools, methods, and mindset. For example, most managers are familiar with thinking about their firms’ offering in terms of products and services, and completely at ease with analyzing individual functions such as production, marketing, or sales. However, few managers have experience with adopting a holistic, system-level perspective, identifying activities instead of functions or organizational units, and analyzing their firm’s entire activity system. Yet this is precisely what is needed in order to improve and innovate the current model, and therefore the previous phases of raising awareness and framing the process are crucial.

Accordingly, compared with the conventional application of the human-centered design method in the development of new products or services, observation in the context of new business model design has to be interpreted more broadly than just with respect to how end-users interact with a product. The focus should be on all business model stakeholders—not only on end-users, but also suppliers, partners, and the company itself (Beckman & Barry, 2007). Also, observation should be made about how stakeholders play their respective roles within a given business model, not just on how they interact with the products and services delivered as part of the business model. Importantly, in the context of innovating a firm’s business model, observation must include an assessment of the competitive dynamics of the ecosystem within which the firm is embedded. Such an assessment will enable an evaluation of potential retaliation to disruptive BMI.

The conversations and insights that such observation will generate are likely to be highly valuable. Indeed, understanding precisely what business model problem the company is facing could be the most important prelude to designing an effective subsequent solution. To what extent and through which means and techniques observation is carried out partly depends on the chosen direction of the design process. In a top-down process, especially one for which ambitious goals are set, the designers might wish to proceed quickly to the idea-generation stage, in order to spur the genesis of bold new models through inspiration with carefully chosen templates, as well as inspirational BMI examples (both from their own industry and from other industries). By contrast, in a bottom-up process, which pursues the goal to evolve the business model in a more gradual, incremental, phase-by-phase fashion, the business model design team might elect to delve deeply into the observation stage, in order to understand more fully what is (potentially) wrong with the current model and what the possibilities could be for innovating it.⁴

The Case of SEC. To illustrate the importance of observation, consider SEC. The SEC team started its business model design process by assessing a number of topics. They stepped into the shoes of their customers and found out that most repairs of the ship engines happened due to unexpected engine failures. This caused frustration to their customers and an experience of “not being enough in control.” The team also observed competitors only to find out that sensors in ship engines was an emerging and immature area, with no real examples from which to learn. They then observed other industries and discovered that in the oil business, sensors were used in pumps located in pipes in remote areas; these pumps are not allowed to fail. The business model moved to a service-oriented business model template: selling predictive maintenance services based on sensor data, on top of selling the pumps. Finally, the team also discovered that their own SEC platform was filled with data, but they lacked the deeper analytical data-mining skills to come up with predictive maintenance insights.

Synthesizing Insights from Observation to Prepare BMI

To synthesize key insights from among a vast amount of data is one of the most challenging tasks in the business model design process. It involves collecting and communicating the data gathered during the observation stage, and organizing them creatively into emerging strategic themes, or to specific customer needs. The design work at this stage is akin to the work that qualitative researchers perform when they sift through large amounts of ethnographic and field data in order to generate new insights into phenomena of interest. Although this phase in the design process seems fuzzy, vague, and hard to codify, borrowing from qualitative research methods can provide enhanced rigor, for example, through tabulation techniques.

Synthesizing can be catalyzed by asking the following questions that help the business model designer to develop a strong sense of the opportunities and challenges that the company could be addressing, the problems that it is (or rather, should be) solving for its various stakeholders, and the forces that will shape the design solution: What is particularly good about the current business model? For example, what are customers and other stakeholders extremely happy with? Where are we currently falling short in helping customers solve their problems? How could we serve them better through a newly designed business model? Do we see new and thrilling customer experiences in our industry or in adjacent industries? Do we see disruptive business model innovations on the horizon? Are we in danger of being bypassed? What new opportunities could we explore as a result of important developments in our ecosystem? What new stakeholders could we involve as partners in our business model? How could we collaborate more and/or better with our partners? However, business model designers should bear in mind that there is no blueprint solution for how to perform the synthesizing step, which remains at its heart a creative act (Brown, 2009).

The Case of SEC. For SEC, this phase in the BMI design process was critical, in the sense that the SEC team discovered that the SEC customers perceived the shipping engine to be part of their bigger “overall service concept”; if the shipping engine fails, their service concept fails—the big yacht cannot sail anymore. In other words, they were willing to pay a premium in exchange for “hassle-free services” from SEC.

Generating Ideas for BMI Anchored on Insightful Problem Understanding

Idea generation involves the creation of new design solutions, based on a deep understanding of the design problem that has been developed during the earlier phases. Idea generation for new business model designs either involves making modifications to an existing model that are novel (as Apple did when it added music distribution via iTunes to its production and design-oriented business model), or it involves creating an entirely new model. Both objectives can be met by conducting disciplined brainstorming during which ideas for new business models are generated, inspired by previous observation and synthesis (in a bottom-up process), or by exposure to unusual templates (in a top-down process), or both.

Although brainstorming is perhaps the best documented part of the design process (e.g., the advice to strive for “wild” ideas), brainstorming sessions on BMI need to combine two elements in order to be successful: (1) content—awareness of different design dimensions (what, how, who, why) and corresponding possibilities for innovation; and (2) creativity—deploying ideation techniques and envisioning new inspiring customer experiences (Beckman & Barry, 2007). That’s why typical brainstorming rules should be adapted to the context of BMI. For example, “wild” business model ideas are those that push beyond the traditional mental models of managers and break the traditional frame of thinking.

In order to recognize the systemic nature of business models, another important rule should be: “Look at the forest, not just the trees!” It encourages brainstormers to adopt a broad, holistic perspective, so as to avoid getting stuck on the details. Exposure to templates and examples from adjacent, or even completely unrelated, industries can increase the likelihood of breaking the frame. The business model of Nike, a sports apparel manufacturer, served as a template for re-designing the business model of an Asian pulp and paper manufacturer. The example of the sports company triggered the idea of focusing on marketing and outsourcing other activities to partners, even those that were once considered to be “core,” such as manufacturing.

Rather than “looking from the outside in,” ideas can also be triggered by “looking from the inside out,” that is, by asking how the existing assets of the company could be redeployed to different uses. Specifically, a series of guiding questions could serve as a starting point to trigger the creative process, especially if a top-down direction is adopted. For example, the CEO and TMT could ask: Can we connect with the customer of our customer, or even to the end customer? Can we create a new role in the industry for ourselves (e.g., become an aggregator)? Can we move to another industry? Can we come up with a new value proposition? A new pricing approach? Can we partner with others, so that we can concentrate on our differentiating activities? These questions could give rise to the development of ideas for BMI.

The Case of SEC. Consider again the SEC example. Combining their insights generated from observation and articulated through synthesis, the SEC team held an idea-generation session during which they came up with the concept of collecting the data from the sensors on the ship engines, developing superb analytical skills, and combining these two building blocks to offer new value-added predictive maintenance recommendations, from which they would generate new revenue streams. For example, if the captain of a big yacht could get the recommendation to perform a one-hour predictive maintenance of the ship engine tonight, he would save a one-day down time next week during a chartered cruise, and therefore this recommendation would be of high value. This, in turn, led to a dual-mode pricing model for the information service: a flat monthly subscription fee for each customer, combined with a fee per predictive maintenance recommendation.

Refining Ideas for BMI: Consolidating, Prototyping, and Evaluating

Refinement in the context of BMI involves consolidating and/or combining the various ideas generated in the previous stage into one or more new business model designs, prototyping the new designs (e.g., by way of experimenting on a small scale and narrow scope), and evaluating the new designs using such criteria as the extent of new value that is created and appropriated through the new model, the likely retaliation of competitors, the ability to scale the new business model, and more (see Appendix). By combining and repeating these steps (i.e., consolidating, prototyping, evaluating), the main goal in this phase of the design process is to achieve focus and clarity on the details of the emerging design.

The activity of consolidating and/or combining ideas that emerged during the brainstorming phase is, once again, a creative process and as such difficult to codify. Yet it is a necessary step because otherwise the managers as designers might get caught up in an endless loop of generating new ideas, without knowing exactly when and where to stop. Consolidation is followed by prototyping, which is increasingly important for senior executives. Indeed, “to create a successful new business model, you usually need to experiment outside the normal organizational setting. You have to develop and test numerous different ideas, nurture the most promising ones and unleash them only when you believe they can work in the real world” (IBM, 2015, p. 25). In addition, “the CEOs of most successful enterprises place a higher premium on agility and experimentation, because they know these are prerequisites for disruptive innovation” (IBM, 2015, p. 11). Prototyping involves building a mock-up of the business model—or parts of it—at the lowest possible cost. In its simplest form, a business model prototype is a storyboard—a description of “how it works,” mixing text, graphical illustration, and video supported by AI tools. It explains what the main activities in the business model are, how they are linked, who performs them, and what products and services are delivered through the activity system to what customers, with what expected benefits for the customers and the other stakeholders in the model. Feedback can then be used to refine the model.

Prototyping can be taken a step further by implementing a crude and simple version on a small scale, thereby enabling experiential learning. The extent to which this is possible will depend on the specific project. Business models that require significant investment in capital expenditures or involve choices of strategic partners that could be difficult to mock-up, are more challenging, yet not impossible, to prototype.

The Case of SEC. Consider SEC again to illustrate how a new business model design can be refined through prototyping. The SEC team first envisioned how customers would experience their new idea (i.e., to offer predictive maintenance services for ship engines). They did so by developing so-called customer journeys in which they envisioned the new interactions between SEC and their customers, including the usage of direct feedback through social media. This exercise led the SEC Board to approve a first market-facing test that included select functionalities. The objective of the test was to observe and learn how the market/customers would respond to the new service. Based on the positive investment decision from the Board, the SEC team brought to life their new predictive maintenance business model through a prototype that they referred to as “wave one.” One of the first requirements was to develop an innovative algorithm that would be able to translate measured engine frequencies through sensors into unique insights regarding predictive maintenance, centered on those engine parts which SEC knew were most sensitive to failures. This algorithm formed the basis of a first client-oriented application, which was rolled out to a small customer group. The app notified a captain or boat owner when a specific kind of predictive intervention was recommended. Based on this first functionality the SEC team gained precious insights into how customers perceived the recommendations (e.g., how valuable and effective they were, and what the customers thought about the pricing levels), which in turn informed SEC’s decision to roll out the early functionalities on a larger scale. It also led to the development of a next version of the application. Most importantly, SEC began building valuable capabilities for turning sensor data into actionable insights.

Implementing the New BMI Design

Implementation in the context of BMI requires putting all the elements in place that are envisioned by the new design. This includes design elements that refer to the what of the business model (i.e., the activities), its how (i.e., the exchanges), its who (i.e., the partnerships), and also the why (e.g., the revenue model). The demarcation with the previous design stage (especially prototyping) could be rather fleeting, insofar as it may not be easy (nor desirable) to say where trial-and-error stops and full-blown implementation begins, especially when implementation proceeds in a gradual manner and when it is guided by feedback-based learning.

Keen attention must be paid at this stage to the company’s organization and strategy, and how they fit with the new business model (Hopkinson et al., 2018). Changes to the operating model and organizational redesign may be required as part of implementation in order to make the new business model work. Also, at this stage, distinctive challenges may arise. Implementation entails the forging of partnerships and the creation of exchange and coordination mechanisms with the parties that are external to the company. In addition, the business model designer needs to take into account issues that relate to the internal organization (including incentive structures; span of control; roles and responsibilities of organization members; HR policies; values, culture, and norms) and product-market strategy (e.g., product-market scope, market timing entry, product-market positioning). The implementation of the new business model may entail changes to any of these elements. In certain cases, the cost of making these changes will be relatively low while in other cases the costs of making the changes will be significant.

A critical element in implementing new business models is that these will also require new business capabilities. In SEC’s example: selling and delivering shipping engines requires different business capabilities as opposed to selling and delivering predictive maintenance services through a digital platform. Organizations need to decide which critical business capabilities within the new business model will be provided by the organization itself (and how to build these) and which ones by others. For example, supporting capabilities like finance and human resources can be insourced from the parental company. And technology-related capabilities can be delivered by a technology partner.

Building a Business Model Innovation Capability at SEC

The SEC team embedded its prototype-based way of working (Phase Three) as a continuous process in the organization. As a result, a whole suite of predictive recommendation services was successfully introduced (e.g., by adding a functionality on fuel usage). As part of a continuous innovation effort, SEC set up and rolled out a number of “next idea-generation” cycles. This led to a new wave of business model innovations. For example, one idea was to leverage Generative AI to create engine-specific (predictive maintenance-related) instructions, including augmented videos to support the maintenance activity. Another idea was to combine the sensor data with weather data through a partner who could provide very detailed weather data on a small-grid level across the globe. In combination with location-based data of the ship, as well as engine and travel plan insights, this could lead to different trip and timing recommendations. Also, the broader ecosystem was examined, leading to first discussions with insurance companies; if ship engines were used more effectively and the overall risk profile is lower (backed up by sensor data and actionable insights), this could lead to lower insurance premiums, where savings again could be shared by all involved, including SEC as platform orchestrator. SEC also realized that they should not run this platform on their own. They approached a technology firm that built the technology platform and is now running the technical operations of the platform on behalf of SEC. SEC concentrates on selling and delivering the platform-based services.

In a relatively short time frame, then, SEC significantly and continuously innovated its business model. SEC came up with a new value proposition for its customers based on delivering actionable insights on predictive maintenance recommendations derived from engine sensor data complemented with trip and timing recommendations. SEC thereby created a significant new revenue stream with interesting profit margins, based on selling information services. Furthermore, SEC as a ship engine producer is now connected directly with insurance companies about risk profiles of ships and engines, and also moved into a number of new partnerships, for example, in the area of weather data. In short, SEC has built a new capability for BMI: through continuous idea-generation cycles, in combination with prototyping new business model ideas, they began to build and manage a dynamic portfolio of business model innovations.

Conclusion

In a rapidly changing economic, social, and technological environment, company managers must continuously evaluate the extent to which there is a fit between the company’s business model and the external ecosystem in which it is embedded, the company’s product-market strategy, and its internal organization capabilities and structure. To maintain their edge and maintain the external, internal, and strategic fit, companies must have the capability to continuously innovate their business model. Developing business model innovation capability is therefore a game changer which allows companies to stay at the top of their game in a rapidly changing world.

Building a BMI capability involves raising awareness, framing the design process, and designing and implementing a novel business model. These three phases are dynamically and temporally linked. In the first phase, awareness for the importance of BMI (and what it means, namely, the “what,” “how,” “who,” and “why” of the firm’s activity system) needs to be created and/or raised among organization members. This eases the way into the second phase, in which the BMI effort needs to be framed by way of reflecting on, and making decisions about, five key aspects including: Which direction should the business model design process take (top-down, bottom-up, or a mix of the two)? Which goals should be pursued? Which templates could be considered? Which constraints could be taken into account (and when)? And which stakeholders could be involved? Following this framing phase, in the third phase the BMI needs to be designed through a guided, iterative trial-and-error process involving observation, synthesis, idea generation, refinement, and implementation. Over time, if repeated across projects and conducted mindfully, the process can be honed into an organizational capability for BMI.

In summary, this chapter provides an actionable framework for building a BMI capability, and it highlights the strategic role of such a firm-level capability. Importantly, the study fills a gap in the scholarly literature at the intersection of capability development and BMI. To date, the process by which firms can develop a BMI capability has not been articulated clearly. Future research on this important topic is necessary. Existing research on capability development, especially in the context of BMI, has focused mainly on Phase Three in the process model that we outlined in this chapter. Complementing and extending the received literature, this chapter suggests that raising awareness among organization members and carefully framing the design process play equally important roles for BMI capability development. However, this conjecture needs to be further developed theoretically and tested empirically, thus opening new avenues for future research. These two phases in building a BMI capability are important due to the unique characteristic of business models as boundary-spanning activity systems that may be difficult to grasp due to their systemic and holistic nature, and that may also fall outside familiar mental schemata of managers. Moreover, our framework highlights dynamic and mutually reinforcing links between the various process phases involved in building a BMI capability in established firms, which could be explored further in future research.

Appendix: Questions for Evaluating New Business Model Designs

• (1) How well are the design goals (e.g., to achieve groundbreaking innovation) being met? How much total value does the new model generate compared to the old one?

• (2) Can we find a revenue model and cost structure to allow for adequate value capture by all business model stakeholders?

• (3) What are the vulnerabilities of the business model? Where can it break down? (For example, is there a lack of incentive alignment of stakeholders?)

• (4) Are constraints effectively being dealt with? What new constraints are created or brought to the forefront? (For example, consider Tesla’s direct-distribution model of new cars that eliminates the need for dealers. In several US states, such as Indiana, direct distribution of new vehicles from the manufacturer to the buyer is prohibited by state law. This regulatory restriction adversely affects the entire business model of Tesla.)

• (5) How does the new business model compare with those of competitors? What points of differentiation does it offer? How easily can it be imitated?

• (6) How scalable is the model?

• (7) How adaptable is the new business model to future changes in digital trends and process drivers?

• (8) How compatible is the new business model with corporate strategy, and possibly with other business models that the firm might have in other areas of business? Does it imply a new corporate strategy that might make more sense than the existing one?

• (9) Are the resources and business capabilities in place to make the new business model a reality, or do they have to be created or acquired (and at what price)? And will we execute on all business capabilities ourselves in the new business model, or will we make smartly use of partners?

• (10) How compatible is the business model with the existing organizational structure? Its compensation and incentive mechanisms?