*A McKinsey-Award Winning Article*

Executive Summary

When Apple introduced the iPod and iTunes store, they crafted a revolution that completely changed the landscape of not only their industry but society as a whole. In the process, they created a nearly $10 billion product that they have continued to build from. While Apple is the most famous example of this brand of innovation strategy, they are not the only company that has successfully leveraged a truly disruptive business model to spark a paradigm shift.

So why is it so difficult for established companies to pull off the new growth that a disruptive business model can bring? Here’s why: They don’t understand their current business model well enough to know if it would suit a new opportunity or hinder it, and they don’t know how to build a new model when they need it.

Drawing on their vast knowledge of disruptive innovation and experience in helping established companies capture game-changing opportunities, Innosight cofounder Mark Johnson, Harvard Business School professor Clay Christensen, and SAP co-CEO Henning Kagermann set out the tools that executives need to do both.

It all starts by understanding your current business model. Successful companies already operate according to a business model that can be broken down into four elements:

  1. Customer value proposition — something that fulfills an important job for the customer in a better way than anything competitors offer.
  2. Profit formula — that which lays out how the company makes money by delivering the value proposition.
  3. Key resources — what the company needs to deliver that proposition, such as technology, products, people, equipment, and so on.
  4. Key processes — the processes required to leverage those resources, such as training and manufacturing.

Game-changing opportunities deliver radically new customer value propositions:

  • They fulfill a job to be done in a dramatically better way, as P&G did with its Swiffer mops.
  • They solve a problem that’s never been solved before, as Apple did with its iPod and iTunes electronic entertainment delivery system.
  • They serve an entirely unaddressed customer base, as Tata Motors is doing with its Nano—the $2,500 car aimed at Indian families who can’t afford any other type of car and usually use motorcycles to get around.

Doing so doesn’t always require a new business model, but a new disruptive business model is called for under certain conditions. It is often needed to leverage a new technology (as in Apple’s case); is generally required when the opportunity addresses an entirely new group of customers (as with the Nano); and is surely in order when an established company needs to fend off a successful disruptor (as the Nano’s competitors will now need to do).

The right kind of disruptive business model can transform an industry and result in incredible growth for an organization. However, too often managers do not know when disruptive innovation is required. This is because they do not understand the existing model well enough to understand when it needs changing — and subsequently, how to change it. 

In order to ascertain whether your organization need to shift to a new disruptive business model, or alter its existing one, Johnson, Christensen, and Kagermann recommend the following:

  1. Determine what it is that makes your existing model work, using the above components for understanding your business model. Potential questions to ask would be: does it solve a customer problem, and what problem? How is it bringing revenue to your company?
  2. Keep a lookout for signs that it is time to change your model, for example if a strong new competitor is emerging.
  3. Deduce whether reinventing your model will be worth the effort and resources. In this situation, it is important to envision whether it will be a truly disruptive business model that will change the industry or market.

The article goes into more detail regarding dissecting your business model and assessing whether an adjustment is needed. The following topics — and more — are addressed:

A Definition of “Business Model”

A more in-depth look at the four interlocking elements that create and deliver value in a business model.

How Great Models Are Built

The key elements of a successful, effective business model, and how these great models are built into game-changing disruptive innovations.

When a New Business Model Is Needed

Helping established companies to evaluate and address when a new business model is needed, and whether it will be worth it.

How Dow Corning Got Out of Its Own Way

Detailing one of the best disruptive innovation examples, how they adapted, and what we can learn to emulate that success. 

What Rules, Norms, and Metrics Are Standing in Your Way?

A guide to help you evaluate your company’s business model, and what might be holding you back from real disruptive innovation, and how to overcome it.