Business Model Innovation and Competitive Imitation

by Ramon Casadesus-Masanell & Feng Zhu

Overview — When and why should an entrant adopt a new business model when the innovation could be imitated by an incumbent? In this paper, HBS professor Ramon Casadesus-Masanell and University of Southern California professor Feng Zhu examine the desirability, or lack thereof, of business model innovations when they cannot be protected, opening the door to competitive imitation. Issues of competing through new business model design become more important given the increasing number of opportunities for business model configurations enabled by technological progress, new customer preferences, and deregulation. Key concepts include:

New entrants in a wide array of industries (such as Ryanair in the airline industry and IKEA in furniture) demonstrate that innovative business models can provide the basis for sustainable business success, even in industries with strong and well-established incumbents.
Firms should take into account the likely competitive effects and responses before revealing a business model innovation.
Just as product and process innovations are hard to protect, business model innovations can be imitated.
For many years to come, firms in all kinds of industries will continue to surprise with unprecedented new ways of capturing value through sponsor-based business model innovation.

Author Abstract

We provide the first formal model of business model innovation in a game-theoretic framework. Our analysis focuses on sponsor-based business model innovations where a firm monetizes its product through sponsors rather than setting prices directly to its customer base. We provide a comprehensive analysis of the range of possible strategic interactions between an innovative entrant and an incumbent where their choices of business models are endogenously determined and where the incumbent may imitate an entrant's business model innovation once it is revealed. We find that the possibility of competitive imitation means an entrant needs to strategically choose whether to reveal its innovation by competing through the new business model, or conceal it by adopting a traditional, established business model. We also quantify the value of business model innovations, and show that the profit implications for the entrant of inventing a new business model and for the incumbent of responding with business model reconfigurations could be substantial. In particular, the value of business model innovation may be so substantial that the incumbent may strictly prefer to compete in a duopoly rather than to remain a monopolist. 46 pages