Business Model Innovation: a critical enabler of productivity improvements

Chander Velu, Professor of Innovation and Economics at the University of Cambridge and a Co-Investigator at The Productivity Institute has written a book about the effects on creating, modifying or defining the fundamental structure and components of a business. In this blog, he discusses his book, ‘Business Model Innovation: A Blueprint for Strategic Change’. Chander is a guest on an episode of Productivity Puzzles, discussing business model innovation. Listen to the episode wherever you get your podcasts.

The concept of the business model has become especially prominent in recent times, even though it has been in use among business practitioners and academic scholars for a long time. Alfred Chandler, the prominent Harvard business historian, outlined eloquently that American firms transformed themselves via vertical and horizontal integration from 1840 onwards following the emergence of the railroad for transportation, telegraph for communication and coal as a major source of energy.

Moreover, Joan Robinson, the distinguished Cambridge economist posited that each production technique might display different degrees of mechanisation involving its own specific blueprints, and there may be no recognisable items in common between one and any other. Although Chandler and Robinson did not explicitly use the term “business model”, the spirit of their analysis describes the architecture of firms that contribute to performance differences.

Business models fuelled by the internet

The more recent prominence of business models was predominantly fuelled by the internet and by digital technologies. Amazon.com, Uber, Airbnb, Google, Netflix and Southwest Airlines are firms that are founded on business model innovations; that is, innovations that involve changes to a business’s value proposition combined with changes to how the value is created and captured by the firm and the network of partners required to do so.

Business model innovation is a critical enabler of productivity improvements. Productivity growth has slowed down in the last fifteen years in major economies, as well as in emerging markets, despite the prevalence of digital technologies. This phenomenon is widely known as the productivity paradox. Studies on the history of new technologies, such as the adoption of electric motors to digital computers, have shown that productivity improvements might be hampered by the limited redesign of business models following the adoption of new technologies by firms.

Why changing business models is tricky

There are two principal reasons for the difficulty that incumbent firms face in innovating their business models. First, senior management tend to get locked into a cognitive frame with a dominant business model design that it is unable to reframe appropriately in a timely manner – the cognitive challenge. For example, Xerox’s success in the photocopying business led to lack of interest from the senior management to commercialise the inventions from its XEROX PARC lab (such as the mouse, graphical user interface and ethernet among others) as they could not directly help enhance the existing business model of the firm by speeding up photocopying.

Second, incumbent firms tend to find it difficult to reconfigure their core activities and processes from an architectural perspective to change the business model – the reconfiguration challenge. For, example Blockbuster responded to the emergence of Netflix by launching an online version, Blockbuster.com and integrating with the physical branch-based model. Such an integrated business model increased the cost of managing the inventory and reduced revenues by the removal of late fees to be compatible with the online model of Netflix.

The dynamics of business model innovation

The book covers the dynamics of business model innovation among incumbent firms as well as start-ups. It covers a breadth of topics that illuminate the theory and concepts that underpin business models, outlining current and direction for future research in business model innovation. Global business cases are applied throughout to illustrate key issues. Topics covered include market creation, leadership, digital technology adoption, small- and medium-sized enterprises, start-ups, sustainability, socio-economic development and conduct risk.

The themes of cognitive and reconfiguration challenge are applied to various context such as the adoption of digital technologies (including developments of robotics and artificial intelligence) as well challenges in energy transitions where business as usual is not an option to achieve sustainability.

What are the opportunities business model innovation present for society?

Also discussed are the principles of the architecture of economic systems, the role of government in influencing business model design, and how organisational structures must adapt in the context of business model innovation.

For example, the business model of the East India Company that played an important role in the development of the British Empire was driven by a combination of private enterprise and government policies. In the modern world, there has been much debate in the literature about whether mission-oriented state investment is needed to take discoveries from science to innovation that are useful to society or whether state intervention alone is sufficient to address market failure. Hence, the design and adoption of new business models require leadership that combines an understanding of techno-economic and political challenges.

It is imperative that the business model, which acts as the blueprint for strategic change, be designed by not only paying attention to the architectural configuration at the firm level but also by looking within the industrial system and the economic system that they operate. The adoption of new business models is key to tackling the opportunities provided by digital technologies and to addressing issues related to sustaining the leadership of incumbent firms, scaling up start-up firms and promoting the competitiveness of small-medium sized enterprises.

These business models are required to address grand themes on societal challenges – such as climate change, healthcare, education, economic inequality and achieving emotional and mental well-being, among others. We are fortunate to have the benefit of digital technologies and other emerging technologies from both the physical (e.g., quantum technologies) and biological sciences to address these challenges by designing suitable business models. The book aims to provide some of the basic conceptual frameworks for designing business models to inspire those in academia, industry and government to work collectively to foster economic and social development that is fair and just for all.

• Professor Chander Velu discusses his work on the Productivity Puzzles podcast Business model innovation and strategic productivity.
• Business Model Innovation: A Blueprint for Strategic Change is published by Cambridge University Press.