Reinventing Your Business Model

Reinventing Your Business Model
Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann.
Harvard Business Review, December 2008

Let’s discuss business model innovation. Why is it so difficult for established companies to pull off the new growth that business model innovation can bring?

Here’s why:  They don’t understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don’t know how to build a new model when they need it.

In “Reinventing Your Business Model,” in the December 2008 Harvard Business Review, the authors reveal what companies must do to capture game-changing opportunities.

Game-changing opportunities address a customer need in a dramatically better way, as P&G did with its Swiffer mops.  They solve a problem that’s never been solved before, as Apple did with its iPod and iTunes music store.  Or they serve a new customer base, as Tata Motors is doing with its Nano — the $2,500 car aimed at Indian families who can’t afford any other type of car.

However, stories of business model innovation from well-established companies are rare.  And a recent American Management Association study determined that no more than 10 percent of innovation investment at global companies is focused on developing new business models.

Yet everyone’s talking about it.  A 2005 survey by the Economist Intelligence Unit reported that over 50 percent of executives believe business model innovation will become even more important for success than product or service innovation.  A 2008 IBM survey of corporate CEOs echoed these results.

To create business model innovations, you should start by thinking about the opportunity to satisfy a real customer who needs a job done.  Then you can construct a blueprint laying out how your company will meet that need at a profit.

A business model consists of four elements that combine to create and deliver value.  They are:

  1. The customer value proposition
  2. The profit formula
  3. The key resources
  4. The key processes

The most important element to get right is the first: the customer value proposition, or CVP.

A successful company is one that has found a way to create value for customers — that is, a way to help customers get an important job done.  A “job” is a problem that needs a solution.

Once you understand the job and all its dimensions, including the full process for how to get it done, you can design the offering.  The more important the job is to the cust...