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Creating Value Through Business Model Innovation

Raphael Amit and Christoph Zott highlight “business model innovation as a way for
general managers and entrepreneurs to create and appropriate value” in their paper
“Creating Value Through Business Model Innovation.” According to the authors,
business model innovation focuses on “how to do business,” as opposed to questions such
as “what product to bring to the market”, “when and where to enter the market” or “what
differentiates the firm and its product in the market?” We offer managers and
entrepreneurs a conceptual primer on business model innovation emphasizing the
importance of activity system thinking.

They believe that innovation should not be simply about new product lines or improved
processes, but also relate to “the firm’s activity system, specifically, its content, structure
and governance.” Their findings show that in a highly interconnected world, particularly
one where financial resources are scarce, “entrepreneurs and managers must look beyond
the product and process and focus on ways to innovate their business model.” This type
of “fresh” business model can “create and exploit opportunities for new revenue and
profit streams,” which can work to counteract an aging model that has historically tied
the firm down with declining revenues and pressures on profit margins.

In this regard, the authors suggest that managers ask themselves the following six key
questions about their business models: (1) What perceived needs can be satisfied through
the new model design? (2) What novel activities are needed to satisfy these perceived
needs (business model content innovation)? (3) How could the required activities be
linked to each other in novel ways (business model structure innovation)? (4) Who
should perform each of the activities that are part of the business model (e.g., the focal
firm or a partner), and what novel governance arrangements could enable this structure
(business model governance innovation)? (5) How is value created through the novel
business model for each of the participants? and (6) What revenue model fits with the
firm's business model to appropriate part of the total value it helps create?

The authors believe that addressing the aforementioned six questions can help “managers
see their firms’ identities more clearly, in the context of the networks and ecosystems in
which their firms operate.” Adopting such a clear business model perspective will assist
managers in purposefully structuring the “activity systems of their firm in the context of
other firms and economic agents in their ecosystems.” They conclude that “this
purposeful design and structuring of business models, which encompasses internal as
well as boundary-spanning activities, are key tasks for general managers and
entrepreneurs and can be an important source of innovation, helping the company look
beyond its traditional sets of partners, competitors, and customers. Most importantly,
perhaps, this approach encourages systemic and holistic thinking when considering
innovation instead of concentrating on isolated, individual choices. The message to
managers is clear: when you innovate, look at the forest, not the trees – and get the
overall design of your activity system right before optimizing the details.”

Paper:
http://www.management.wharton.upenn.edu/amitresearch/docs/2012/Amit_Creating_Val
ue_Business_Model_Innovation.pdf

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