I studied a number of business models by describing them through 9 business model building blocks in order to find communalities and differences in their degree and type of innovation. I came up with the following rough distinction:
First of all, there is supply driven business model innovation and demand driven business model innovation.
Supply-driven innovation is achieved by doing things in a new way or by applying new technologies to an existing business model. Dell is a nice illustration of both. Dell innovated in the business model by selling directly to customers, but also by applying a new technology, the Web, as a distribution channel to reach the new customers.
Demand-driven innovation is customer driven, based on new or changing customer needs, tastes, and preferences. The music industry came under pressure to come up with a more innovative business model in r4sponse to the development of file sharing platforms such as Napster and Kazaa allowed people to download music for free en masse (illegally).
Furthermore, by studying different examples, I found it useful to distinguish between three types of business model innovation: innovative business models (where companies do similar things in a new way and change industries as a consequence), extended business models (where companies build on the existing), and new business models (where companies create an entirely new business model).
Doing similar things differently means offering similar value propositions in an entirely new fashion. Skype is a company that offers a value proposition that is roughly similar to phone companies: phone calls (of course this is very simplistic, yet it serves the purpose of illustration).
But because its business model allows it to use the Internet as a free telecom infrastructure/network it has extremely low variable costs and can reach customers worldwide. Skype’s business model offers the same thing, but differently because it uses different resources, needs different competencies and uses different distribution channels.
Extending an existing business models means building on the current building blocks by adding new ones. A current example is the so-called quadruple play in the competing telecom and cable industries where competitors from both industries aim at offering mobile and fixed communication, Internet broadband and TV all in one package.
Sometimes entirely new business models pop up when new markets emerge. Downloading ring-tones for mobile phones is a nice illustration of what can happen when entrepreneurs find ways of exploiting new technologies and trends.