BUSINESS AND MARKETING INNOVATION WORKSHOPS

The first opportunity is the chance to “democratize” a market—that is, to open it up to people who have previously been entirely shut out— because all current alternatives are either too expensive, time-consuming, complicated, or inaccessible for them. (with print app marketing for example) To use the computing world as an example, we went from mainframe computers to minicomputers, to personal computers, to laptop computers, to netbooks and handhelds. And each of those democratizing moves, where computing became more ubiquitous and accessible to more people, required a different business model. There’s a lot more to it than that, but that’s a fairly simple example.

The final circumstance in which business model innovation is needed is to capitalize on an internal innovation that doesn’t mesh well with your current business model. Xerox PARC (XRX) is the classic sad example—scientists there famously came up with the graphical user interface and the mouse. But those technologies would have required Xerox to take a different approach than just saying, “How does this apply to copiers and the copier business model?” So those technologies ended up in the Apple (AAPL) computing business model. The Ethernet technology went into 3Com, and Adobe (ADBE) used the PostScript technology when it started up.

Really, those technologies required three different business models. Xerox wasn’t willing to come up with new printing business models and therefore didn’t end up with any part in commercializing any of those technologies.

The only way an individual company can determine for sure whether a particular threat or opportunity requires an entirely new business model is to work up an initial estimate of the business model that could capture the new opportunity (or address the threat) and compare it with its current model. The Swiffer, for instance, although it was highly disruptive to the traditional mop makers, fit squarely within Procter & Gamble’s (PG) established model for making and distributing household consumables in high volume.

That’s why it’s imperative that companies judge opportunities and threats first according to their own capacity to meet them— (internal innovation workshops and educating staff to deploy a internal innovation culture) that is according to how they fit with their own business models—rather than according to how near or far the opportunity might be to competitors. Going after a seemingly lucrative opportunity with the wrong business model is the reason so many companies fail in their efforts at transformational growth. Failing to respond to a disruptor in your market because it requires you to develop a new business model can be suicidal, as the big integrated steel companies found out.

Match the four external circumstances to the internal capabilities of your current business model. If responses to those circumstances require changing any of the things I’ve mentioned above, then you’re probably not just looking at a tweak of the business model, but something fundamentally different.

Conversely, though, failing to grasp opportunities like P&G had with Swiffer to disrupt other markets using your current business model is just throwing money away—something companies can ill afford in the current economy. That said, if the opportunity requires a business model that features smaller margins, a much smaller overhead structure, or a dramatically changed resource velocity(that is, a dramatic change in the speed with which assets need to move through the business system, like digital printing allows), it’s a good bet that it can only be addressed by setting up a separate unit to run this separate business model.

The same goes for models that need to run under different metrics, norms, or business rules (different gross margins, unit pricing, unit margins, quality measures, time to break-even, individual rewards and incentives, etc.). That’s a lot to take in, but the bottom line is that when addressing that big, big question of when business model innovation is called for, here’s how best to think about it: Match the four external circumstances to the internal capabilities of your current business model. If responses to those circumstances require changing any of the things I’ve mentioned above, then you’re probably not just looking at a tweak of the business model, but something fundamentally different.