Neuromarketing

Creating Value through business Model Innovation

By Rafael Amit and Christoph Zott

Innovations to improve process and products are often expensive and time consuming; they require investment from R&D to specialize resources. Business Model innovations are an alternative or complement to product or process innovation. It’s not enough to make a difference on product quality, it is important to innovate in areas where competition does not act. Business innovation matters because it represents an unutilized source of future value and competitors find it more difficult to imitate and because it helps managers to solve the apparent trade-off between innovation costs and benefits by addressing how they do business by involving patterns in new value creating activities. Business model is as a system of interconnected and interdependent activities that determines the way the company does business with its customers, partners and vendors.

How to innovate in Business model design

An innovative business model can either create a new market or allow a company to create and exploit new opportunities in existing markets. Business model innovation can occur in a number of ways, through a change in the three design elements that characterize a company’s business model.

1. Content. By adding novel activities, for example, through forward or backward integration. The content of an activity system refers to the selection of activities to be performed.

2. Structure. By linking activities in novel ways. Describes how the activities are linked and in what sequence.

3. Governance. By changing one or more parties that perform any of the activities. It refers to who performs the activity

How does a company increase the chances of developing the right business model for its situation? There are 4 interlinked value drivers of business models; its presence enhances the value-creation potential of a business model

1. Novelty captures the degree of business model innovation that is embodied by the activity system.

2. Lock-in refers to those business model activities that create switching costs or enhanced incentives for business model participants to stay and transact within the activity system. E.g. Nespresso, machine & coffee capsule.

3. Complementarities refer to the value-enhancing effect of the interdependencies among business model activities. E.g eBay, which offers a platform & PayPal

4. Efficiency refers to cost savings through the interconnections of the activity system. E.g. Wal-Mart low-cost strategy & logistics

Interdependencies in Business Models. Interdependencies are created by entrepreneurs or managers

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