ing mechanisms. Even without novel
technology, new business models can
be central in their own right to ensure
business success. For example, Dell
did not focus on improving the personal computer, but innovated in an aspect of its business model, namely supply chain and distribution systems, to
deliver compelling value to end users.
A usage-based auto insurance
scheme, called Pay As You Drive
(PAYD) developed by Progressive
Corporation, is a good example of a
business model that has undergone a
process of innovation and adaptation
over a decade.a Based on a family of
business method patents, this insurance method is part of a new business
model that empowers drivers to control their consumption (customer value proposition), serves latent markets
for consumers previously reluctant to
insure because premiums were too
high (market segment identification),
and fundamentally restructures the
revenue model through lower premium levels but also lower claims. Back
in 1999, PAYD used GPS satellites
to determine when, where, and how
much an insured vehicle was driven
in order to determine the premium.
High technology costs and policyholders’ perception of privacy invasion posed challenges to implementing the business model. Progressive
worked in partnership with insurance
telematics suppliers to lower the cost
of monitoring devices. Progressive
also took a long-term view in educating drivers via the PAYD portal, in order to achieve a right balance between
the perceived cost of privacy invasion
and the benefits of greater control
over driving behavior and hence insurance cost. Thus, the ecosystem
for a business model takes time to
develop, not only in terms of the development of affordable supporting
technologies, but also in terms of the
emergence of educated consumers
and regulatory bodies.
As firms experiment with novel
mechanisms for value creation and
capture, they must bring to bear cross-functional capabilities in technology,
a This case is based on Panos Dessyllas and Mari
Sako, “Profiting from Business Model Innovation: Evidence from Pay-As-You-Drive Auto Insurance,” Research Policy, 2012, forthcoming.
even without novel
business models can
be central in their
own right to ensure
intellectual property management,
marketing, procurement, and finance.
What Causes Disruption
in Business models?
Business model innovation can be
subjected to continuous and incremental changes, as previously mentioned, but it may also have the potential capacity for disruption. So, what
are the sources of disruption in business model innovation?
Disruptions occur, of course, as a result of technological progress such as
in information and communications
technology. They also occur as a result of identifying new latent markets.
Within the developed world, companies in industries as diverse as airlines,
automobiles, banking, and media have
seen their markets invaded by new and
disruptive business models. New entrants, such as Southwest Airlines and
EasyJet in air travel, have captured market share by targeting distinctive market segments. More recently, low-cost
disrupters hail from emerging markets,
such as Tata Motors from India with the
Nano in automobiles and Galanz from
China with microwave ovens.
What is common across these new
players is their ability to produce value-
for-money products or services for low-
end markets that have been hitherto
underserved and latent.
what turns such low-cost innovation
into a disruptive business model is
the new players’ ability to create new
markets with new value propositions—
offering high tech and niche market
products at low cost—for customers.
Thus, in identifying new markets, we
are back to basics, to one of the fun-
damental principles of innovation ac-
cording to Joseph Schumpeter, known
for coining the term “creative destruc-
tion” in economics.
Business model is a term much used
but seldom defined explicitly. The
next time someone asks you “what
is the business model?” you know,
at a minimum, to refer to the way
your enterprise creates and delivers
value to customers. Some strategists
would also want to know the manner in which the enterprise captures
value and converts it into profit. If
this notion is adopted, designing and
implementing business models is the
essence of strategy, to ensure sustainable competitive advantage.
Despite some definitional ambiguity, business model remains an important notion precisely because of its integrative nature. Unlike technological
innovation led by the R&D department,
business model innovation requires
cross-functional mechanisms for creating (and capturing) new value for users.
Moreover, business models are at
the heart of innovation in distinctive
ways. First, new technologies create
opportunities for new business models. Second, appropriate business
models are necessary to translate technical success into commercial success.
Third, business models themselves
are subject to innovation involving discontinuous changes in the paradigm
used by firms to go to market. In this
sense, the ability to sense deep truths
about what consumers really want, to
satisfy consumers’ unmet needs, is
perhaps the most important driver of
business model innovation.
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in the New Innovation Landscape. harvard business
school Press, boston, Ma, 2006.
2. ghaziani, a. and ventresca, M.J. Keywords and
cultural change: Frame analysis of business model
public talk, 1975–2000. Sociological Forum 20, 4
3. hart, s.l. and Christensen, C. the great leap: driving
innovation from the base of the pyramid. MI T Sloan
Management Review (Fall 2002), 51–56.
4. teece, d. business models, business strategy, and
innovation. Long Range Planning 43 (2010), 172–194.
5. Zott, C. and amit, r. business model design: an
activity based perspective. Long Range Planning 43
6. Zott, C. et al. the business model: recent
developments and future research. Journal of
Management 37, 4 (2011), 1019–1042.
Mari Sako ( firstname.lastname@example.org) is Professor of
Management studies at saïd business school, university
of oxford, u.K.