How Can Today’s Strategy Leaders Define Tomorrow’s Business Models?
How can strategy officers anticipate — if not also implement — the business models of tomorrow?
Companies that find and exploit new business models reap tremendous rewards. Take the subscription model. Though its roots go at least as far back as the seventeenth century, the internet and cloud computing unlocked huge new potential for shifting from single customer transactions to ongoing relationships. Innovators who saw the potential of subscription + cloud enjoyed the biggest wins.
Netflix, founded in 1997, was celebrating its first year of profitability in 2003 with $272.2 million in revenue. But after adopting its streaming subscription model, Netflix made the leap from nice-to-have to have-to-have, going from unicorn to decacorn to super-unicorn in the years since.
Business model innovation often starts within companies that are already experiencing success. They’re growing in their key focus area, and they want to foresee — and indeed, define — the changes that will rule business in the future. Doing so depends on proactive, top-down efforts. Those who anticipate the business models of tomorrow are those who begin building them today — understanding that information-gathering is as valuable an output as revenue.
As leaders seek to architect tomorrow’s business models, here are the top recommended tips from the Outthinker Strategy Network’s chief strategy officers .
3 principles for strategy leaders focused on business model innovation
- Start with executive sponsorship
A natural danger of business model innovation within an already successful organization is that the organization will tend to focus on what already works. That is, when they can connect efforts to outcomes in their key focus area, they may become reticent to devote effort to areas of innovation that don’t immediately produce similar outcomes. Without a strong executive sponsor, employees will favor pursuits that they know produce measurable results.
On a basic level, it shows people throughout the organization that you consider innovation a serious pursuit. But it also rallies everyone around a common objective.
When employees understand that business model innovation is a top-down mandate, it’s more likely to precipitate bottom-up creativity. Ideas will come not only from high-level innovators, but from rank-and-file employees looking to make their mark.
- Define your metrics of success (and don’t expect profitability too early)
Measuring the success of business model innovation requires a shift in perspective. Organizations used to measuring pipeline, revenue, and profit will have to complement these metrics with others — some less tangible.
In early days, it’s more important to estimate potential business than to secure actual business. How much revenue could you make if this initiative were to succeed at the highest level? Put differently, what’s its total addressable market (TAM)? Moreover: What do you expect to learn, and how can you quantify knowledge gains as well as fiscal gains? The “cost of learning” can be a valuable metric to inspire innovation efforts.
Obviously, profitability will be a necessity at some point if the initiative is to continue. But profitability won’t come right away, and in some cases may not appear for three to five years down the line. How long can you continue these initiatives without profitability? At what points should you reevaluate the balance of revenue to profit and either adjust course or sunset the initiative?
- Permit failure
At heart, business model innovation is about engineering the future. As no one knows precisely how the future will look, no one should be shamed for missing the mark. Indeed, anyone who takes a full swing in good faith and learns something valuable should be celebrated, regardless of the results of their efforts.
This again depends on strong executive sponsorship. Leaders set the tone and write the principles that everyone else will live and work by. Leaders who explicitly state their comfort with failure will get much more out of their teams than leaders dogmatically focused on financial successes.
As you zoom in, there are many other factors to consider — should you staff new initiatives with current employees, or outside talent? Is there room for partnerships, possibly with customers/clients? Can you fuse new initiatives with your core business, or will it take an entirely new organization?
The most specific questions will be answered on a case-by-case basis. But executive sponsorship, clearly defined metrics and timelines of success, and an appetite for failure will remain paramount for all business model innovators.