Impact of business model innovation on business ecosystems
Business model innovation or BMI generally refers to the models and systems companies use to innovate their products and services with the goal of becoming more profitable. Innovations may be used to bring a new product to market or improve an existing product thereby adding new revenue streams or lowering marginal costs.
Profit seeking outcomes are not the only measure one uses to categorize success. In recent decades there's been an increased demand for the consideration of other areas of impact, such as: business ecosystems, society and planet.
A new way of approaching strategic management would be to consider, in more detail, the combined effects of: BMI, sustainable BMI, ecosystem innovation and sustainable ecosystem innovation. See Figure 1 for a visual clarification of the four effects. As an extension, value destruction and impacts over time must be applied to better understand each of the four effects and their positive or negative outcomes.
BMI mustn't only be judged for its effect on profits alone. The health and well-being of business ecosystems (laterally and vertically), societal effects due to the innovation and the cost to the environment are equally worthy of thought and consideration.
The problem with BMI is that firms are too invested in new products and services and their impact on profitability that little to no concern is placed on the potential for value destruction. In this context, value destruction describes how the new business innovation negatively impacts the market, the actors within the market and society in general.
Since there is an inherit lack of concern for value destruction during the BMI process, a concerted effort must be made to ask “why do it, who might benefit, and who might not?” This line of questioning could not only mitigate but also anticipate value destruction.
Here are some examples of BMI and value destruction:
- Driving apps like Uber and Lyft: Loss of income for established taxi companies and drivers. For example, the New York City market was saturated by a taxi medallion market whereby medallions were used to establish rights to entry into the lucrative market. Prior to apps like Uber these medallions had values close to 1 million dollars. There were a large number of stakeholders within the older system that were negatively impacted and suffered value destruction. Even at the lower levels of the industry, the individual taxi driver, their large sums of investment capital; namely cars and permitted rights to routes underwent a drastic and quick devaluation in value as they saw the barriers to entry into the taxi market dissipate almost overnight. Companies like Uber created a paradigm shift in the ways riders procured access to transportation that much is clear, however, the benefits must be weighed by their deleterious outcomes.
- Social Media: The advent of social media companies had a profound impact on information exchange. YouTube allowed independent film makers, journalist and yet to be discovered industries to rise into prominence. Viewers had a plethora of "programming" choices at their finger tips. With massively low budget productions gaining the eyes and ears of billions of potential watchers, legacy type production firms and companies quickly discovered their stranglehold on information flow was severely impacted. The corporate news media found themselves in competition with everyone; the mail boy from the seventh floor, the head cheerleader from the high school down the street and a host of go-getter parents sharing their thoughts and opinions. For the first time regular people could see what others like them were thinking and doing. Now information wasn't carefully crafted by those that considered themselves "elite" and more than a little special. To make things worse, advertisers pulled out of the mainstream media and their multimillion dollar contracts and started offering pennies on the dollars to much smaller yet impactful mediums. To this day the mainstream media is reeling by the value destruction social media has wrought upon them.
- Ford Motor Company and the Assembly Line: Ford was the first car company to perfect the assembly line. This model helped win a war, brought social change to the sexes, and led to a thriving middle class. For the first time cars could be made in volume cheaper and faster than ever before. This led to the day when every family could have a car in their driveway. Several decades later those same driveways now have two or three cars in them. Can you think of some ways value was destroyed? Those car manufacturers who were not able to make the transition to the assembly line were destroyed. Low volume, high value car manufacturers were put out of business. The increased volume of cars on the road increased oil and gas demand and I know I do not have to spell out the negative implications of that, right? Furthermore, the assembly line intensified compartmentalization of craftsmanship which had the impact of devaluing trades workers for low skill manual factory workers. Fewer engineers were required which meant a larger cut of the value produced went to the executive class. Then came the computer age and robots which further exacerbated the problem. The assembly line, while miraculous in its effect on productivity and profit was incredibly detrimental to worker salaries and the environment. In conjunction with globalization, the value destruction caused by the assembly line was complete!
No one is arguing against advances in BMI. Not at all. All of these advances in technology and innovation were positive and an important part of human growth and evolution. However, it is also important to understand how these innovations will affect existing business ecosystems and the people within them.
Attention should be spend on circular business models with a holistic approach. A holistic approach is concerned with enabling recycling, reducing the use of resources and understanding social, environmental and economic impacts of new business models. Doing so would foster responsible research and innovation overall.
As discussed in our third point above, the Ford Motor Company, the assembly line innovation had large impacts taking decades to realize. Our reliance on unsustainable fossil fuels and wealth transfer are examples of environmental and social upheavals difficult if not impossible to foresee at the time.
What is needed are strategies such as event tracking, homogeneous longitudinal data and processual approaches to predict positive and negative cycles of formation and evolution within BMI's.
A good example of a business model innovation adhering to sustainability and recycling is from 2012. A Dutch online sharing forum allows members of the community to share and borrow items with each other free of charge.
This reduces the need for hyper-consumerism whereby each household purchases products that are not in continual use but required for many if not all households. This increases resource demands as well as demand for waste removal. Instead of each household purchasing a vacuum cleaner, snow blower, lawn mower, or ladder, these items can be shared and passed around from person to person.
Instead of 10 vacuum cleaners being thrown away when they no longer function, perhaps that number could be reduced to 5 or 6 which reduces the amount of waste produced.
If businesses like Alibaba and Amazon assessed their business practices and their affect on resources and waste they could have predicted the negative impacts to society and the environment.
The likelihood those impacts would have changed their actions can be called into question. After all, these companies, like all companies, are profit seekers but if regulatory conditions were established to mitigate these outcomes more might have been done to diminish their destruction over time.
Snihur Y. & Bocken N. (2022). A call for action: The impact of business model innovation on business ecosystems, society and planet. Long Range Planning, 1-13. https://doi.org/10.1016/j.lrp.2022.102182
The information within this article was inspired by a peer-reviewed article in and publication called, Long Range Planning. The article goes into much more detail about business model innovation and it's impacts for businesses, society and the environment.
We recommend you ready the article using the DOI link provided. There are a number of interesting points regarding sustainability from both a business and impact perspective.