Strategy & Innovation February 17, 2010, 3:43PM EST

Stuck? Take A Look At Your Business Model

Energy, healthcare and media executives could benefit by rethinking their industry business models, says Innosight chairman Mark Johnson

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Mark Johnson, Chairman and Co-Founder of Innosight, is author of Seizing the White Space: Business Model Innovation for Growth and Renewal (Harvard Business Press: February 2010). He talked with Strategy & Innovation editor Renee Hopkins about why business model innovation is important and how companies can master it.

In your book, you say "disruptive innovation and business model innovation are opposite sides of the same coin." How did you get started thinking this way, and why is it important?

We start with the work of disruptive innovation, which says that when you go into a new market that offers an opportunity for new growth, you should come in with a simpler, low-cost approach. This way you can offer products or services the incumbent's not going to be motivated to match, because it's either too small a market, the margins aren't interesting, or it doesn't further the company goals.

Now, why doesn't the incumbent go after the entrant who does something disruptive? Clay Christensen noticed this phenomenon in the disk drive industry—that those who succeeded were not the incumbents, but a new set of companies, the disruptors. That's also what happened with Digital Equipment (DEC), in the minicomputer world. Strangely, DEC didn't go after the personal computer when it came to the consumer market and schools. Why?

It's not that the incumbents couldn't have addressed these technological innovations within their own four walls. But they didn't have a business model that would allow them to take advantage of these technological innovations. Even if you don't define business model as I do in my book, DEC executives had a "theory of the case" of how they did business, how they added value for customers, and how they succeeded in business, which didn't account for the nature of the personal computer and how it was sold uniquely to consumers at first. Therefore they didn't allocate resources to that technology—so it was a resource allocation issue that could have been addressed by business model innovation.

Disruptive innovation and business model innovation are linked, are two sides of the same coin, because disruption isn't inherent in the technology, it's inherent in the business model. Years ago, when we at Innosight were working out the rationale for disruption, we hadn't yet taken it to the next level and explored in detail what a business model was, exactly. So when I had the opportunity to take on this topic with Dan Pantaleo, a VP in Global Communications at SAP (SAP), I jumped on it. What did we mean, when we spoke of disruption in a business model? What does it mean to change a business model? What are the reasons, the circumstances, that would require you to change a business model?

We did realize it's not always one-to-one. Not all disruptive innovations entail business model innovation and not all business model innovations are disruptive innovations. Sometimes companies embark on business model innovation independent of disruption in the classic sense. As I wrote in the book, a great example of that is FedEx (FDX) addressing unmet jobs by creating a whole new business system that one-upped UPS and the Postal Service. FedEx was not really disruptive to either UPS's or the Post Office's business models; in fact, FedEx's system should have been very attractive to either of those companies, since it would have allowed either of them to make more money and higher margins from their most-demanding customers. But it was such a fundamentally different business model from the ones they were operating under, they couldn't change to grasp the opportunity to fulfill that unmet need, however high the margins may have been.

UPS and the Post Office couldn't change their business models or wouldn't change them?

Whether threatened by classic disruption or not, companies have a tough time changing their business models. In fact, really they don't change them significantly.