This article discusses the scope of an innovation capability and the perspective of top down and bottom up business model innovation.
In a recent client conversation, we discussed visions for an innovation capability. In the same week, we had a conversation with another company about a business model innovation capability. Interestingly the topics and questions we discussed were very similar to both conversations.
Although implicitly clear to me, this prompted the following question. What is the difference between an innovation capability and a business model innovation capability and does it matter?
I would be very interested to hear or read if your organisation has a business model innovation capability? First, please allow me to explore this topic a little further.
The new innovation capability
Let’s start with the innovation capability. Traditionally the innovation capability was the same as the research and development (R&D) department. This department has a focus on product innovation, has a technical focus and uses significant budgets, resources and time.
In recent years the scope of the innovation capability has been broadened. The traditional product focus is making space for innovation from other parts of the business model. It makes sense as Doblin research has shown that product innovation efforts have a much lower return on investment compared to innovation efforts on revenue models, customer channels and partnerships
Not only in scope but also the skills set of the innovation capability is increased. New skills such as agile, design thinking and lean start-up are being added to the repertoire. This broadening of skills sets is driven by the need to manage uncertainty and we have already seen major disruption in the taxi and hotel industries due to Uber and AirBnB. Which industry is set to be disrupted next?
As a result, long term strategy and business development are slowly being replaced by intrapreneurial innovation. Like start-ups, large organisations such as GE and ING are now using early customer interaction with minimal viable products (MVP’s) to quickly de-risk their strategic assumptions, paving the way for grounded MVP roadmap.
As such, the scope of the traditional innovation capability is extended from product to the entire business model, supported by agile, design thinking and lean start-up. In effect, the new innovation capability is a business model innovation capability.
Different approaches of business model innovation
We described the old and new scope and skill sets of the innovation capability and described the innovation capability that encompasses business model innovation, but what type of business model innovation specifically?
Firstly, we’ll make a distinction between a bottom-up and a top-down approach to business model innovation. With bottom-up approach, we mean innovation directed and funded by local business units. With top-down approach, we mean innovation that is directed and funded from the corporate department. The distinction between the two approaches is important because each has a different scope and skills set. This will be explained below.
The scope of the bottom-up approach is to innovate the various elements of the current business model or models – the scope described in the previous paragraph. This is achieved through the aforementioned agile, design thinking and lean start-up skill sets.
An example is an innovation project run by the local sales department of a Spanish business unit within a large healthcare multinational. The business unit initiated its own innovation program in which they explored new revenue models for offering current services. The sales department used design thinking and lean start-up to design and test their assumptions with their customers, and as a result, local management is investing in a pilot in which freemium healthcare services are offered.
The scope of the top-down approach on the other hand is to innovate beyond the current business models. This is best done in a sandbox – an entity separate from the business. In this environment, the same skills apply as the bottom-up skills, but are complemented by strong strategic skills to define and re-iterate based on trends, vision and learnings.
Taking further the earlier example, the healthcare multinational has set-up a new business unit within a sandbox, in which they are experimenting with various business models such as a financial platform services that could later complement or replace the current healthcare services.
Another part of the scope of the top-down approach is the business models’ portfolio. This portfolio is an overview of all organisational business models and this is best done by the corporate department. With this overview, the corporate team can work on the industry dominant business model and business models coherency or business models adding mutual value to each other.
The importance of these activities is underlined by Deloitte. According to their research, exceptionally performing companies focus on business model coherency and drive value from an industry dominant business model. Although this focus doesn’t bring innovation per se, it gives direction in where to conduct innovation efforts.
As an example; the healthcare multinational corporate innovation team assessed the Spanish Freemium healthcare services business model as part of the business model portfolio. According to the corporate team, this business model is supporting the industry dominant business model.
Why does this matter?
Let’s conclude the differences between an innovation capability and a business model innovation capability and see if this matters.
An innovation capability encompasses business model innovation. Hence, pragmatically there is no difference between an innovation capability and a business model innovation capability.
We then took another perspective by recognising two approaches to business model innovation: bottom-up and top-down. Why does this distinction matter?
- The bottom-up approach scope is innovating elements of the current business models.
- The top-down approach has a different scope, assessing current business models as a portfolio and innovating business models beyond the current business models.
In other words, taking a bottom-up and/or top-down approach to business model innovation determines the scope of the innovation capability.