There are many similarities between waves and the introduction of new business models. Hence, the nature of business model innovation can be explained in relatively simple terms by using the wave analogy: Assuming your organization was a surfer, then ...
... the choice of travel destination would correspond to the vision of your organization: In which geographic market and in which sector do you want to be successful? What kind of organization do you want to be: traveling flexibly like a backpacker or luxurious in a suite in a five-star hotel?
... the choice of the beach to go surfing ("Where are the best waves today?") and the surfboard to take would correspond to the strategy and tactics in the competitive environment: Which target groups do you want to address, and with which offerings? Where are the few other skilled surfers that compete with you for the best waves?
An innovative company is thus not only capable of riding a wave. Like an experienced surfer, it would also recognize promising waves long before they arrive and be at the right spot at the right time: The wave will then be steep enough to stand up, and with enough time left for a long ride before it breaks or hits the beach.
The core of the wave analogy is indeed based on the shape of the (business model) wave, i.e. its cross-section. We distinguish two dimensions: 1) The height of the wave: convergence and divergence, and 2) The substance of the wave: creativity/intuition and reflection/analysis. The wave shape itself results from the right mix of these two dimensions over the course of the innovation process. We subdivide the innovation process into six phases — each with a distinct profile — that together form the shape of the wave (see illustration). Deviations from the ideal will likely lead to problems when introducing or transforming business models.
The height of the wave: convergence and divergence
Especially before and during the early stages of business model transformations, old certainties and business practices need to be challenged. This is what we call "divergence". At some point, however, top management also needs to agree on what the new priorities should be and what approach to follow, i.e. to converge again. At the same time, listening to critical feedback and continuously challenging assumptions remains vital: No matter how brilliant the original business model design – the time will come when it needs to be revised or replaced altogether.
The substance of the wave: creativity/intuition and reflection/analysis
Successful business models are usually the result of a combination of heart and mind. In order to really meet the needs of the customer, a deep understanding is required – also on an emotional level. Subsequently, creativity is required to find a smart solution. A solid fact base and robust analyses are used to validate that the solution is viable indeed. If a company relies too much on the gut feeling of its decision makers, or if it develops a reasonable but uninspired concept, then the resulting business model will often lack the substance for sustained success.
Phase 1 is about seeing opportunities in the uncertainty and ambiguity of the market environment (instead of only risks). Identifying important market trends and being open to fundamental changes will enable management to build a new shared vision that can inspire and guide future innovation efforts.
Phase 2 relies on the capability of the organization to produce a large quantity of diverse, high-quality ideas. This includes radical as well as incremental ideas; it includes ideas related to products, processes, or business models as a whole.
During Phase 3, the ideas that have been generated are combined, refined, and translated into sustainable business model concepts. These concepts then need to be validated (e.g., based on prototypes): they must address real customer needs, be technically feasible and economically viable at the same time. Due to the potentially high cost of innovation efforts, effective prioritization is vital during this phase.
Phase 4 is about how to put the new business model into practice. Depending on the specific business model, this requires a more or less extensive planning and preparation phase. For example, this may include when and where certain resources need to be made available, potential partnerships, the market entry strategy, and much more.
Phase 5 is the actual implementation. The necessary workforce is hired, organizational structures are created, long-term contracts are signed or new production plants get built (depending on the business model). Key challenges include protecting the original value proposition from harmful interests (e.g., due to internal competition), and still being flexible enough to adapt the concept based on new insights. Moreover, managing change in large organizations requires significant attention from the management team.
After go-live of the new business model, immediate deficits are corrected and value creation is improved continuously. Over time, searching for new signals from customers, competitors and other relevant stakeholders gains importance. If needed, the business model is revised, or even replaced by a new one. Eventually, this innovation cycle reaches its final stage and a new "Business Model Wave" emerges.
In practice, all six phases are interwoven and iterative in nature. The fact that reality is more complex than this model might suggest does not imply, however, that a company cannot manage business model innovation in a systematic way. To the contrary – when we at SOMMERRUST support clients with their innovation efforts, we ensure that "creative chaos" is channeled and that concepts get validated and optimized rigorously.
The introduction of a new business model can fail during any of the six phases (even though the consequences of mistakes often become apparent rather late in the process). The whole process is only as strong as its weakest link. For this reason, we have developed a way to identify such weak points reliably with our Business Model Waves framework.
Many rules of thumb in management work extraordinarily well under normal circumstances. Yet we usually do not understand exactly why they work so well. This fact becomes very dangerous, however, as soon as the circumstances are not "normal". The same is obviously true for our BM Waves model. Hence, some theory and empirical research have been very helpful to understand the limitations of the model.
The BM Waves model thus does not only rely on our professional experience from management consulting. It also benefits from scientific insights, i.e. the research for a PhD thesis. The corresponding book was published by Springer in 2012 under the title "Managing Green Business Model Transformations".
During his research, Axel Sommer studied the transformation of business models based on environmental sustainability. The research was conducted with Prof. Schaltegger of the Centre for Sustainability Management (CSM) at the Leuphana University Lüneburg. Apart from theoretical considerations, the book includes case studies of companies that transformed their business models - some with great success, some with great difficulty.
The book can e.g. be ordered here: