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In this blog I have been writing about the process of designing new business models for the last few months.  (This is part of the process of writing a new book on business model innovation.)

This post describes the second major step in the process we use to help our clients understand business model innovation and to develop their own innovations.

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In the process of developing a new business model, the defining context must always be the external world, the marketplace in which every innovation will ultimately have to prove itself.

This “external world” is a big, complicated, confusing place, and yet we have to bring that massive confusion down to some key understandings and principles that we can design and plan for.

To do that we ask question like:

• What are the key trends?
• What’s driving change?
• Where are we headed?

At InnovationLabs we have been constantly alert to the ongoing and massive process of social and economic change for the last twenty-five years, and we have identified four key economic drivers upon which nearly every contemporary business model innovation seems to be built.  (We’re open to identifying others, but these are the only one’s we’ve seen so far.)

Hence, we study these not only to understand how others have succeeded at business model innovation, but also to help us develop our own innovations.

The first is ‘Digitization’, the shift to digital technology.  As you know, all forms of information and entertainment, as well as for product design, manufacturing, logistics management, communication, and collaboration have recently gone digital, or they’re going digital now.  You’ve seen and experienced this trend – you probably own an iPod and a digital camera, for example – but have you thought about what it means for your industry and your company?

An important aspect of the digital tsunami is the explosion of social media, which has two critical dimensions.  First is the increasing prevalence of online social networking platforms that influence the needs, desires, attitudes, and choices of millions of people.  And second is the expansion of creative content production to everyone, and its accessibility through platforms such as YouTube.  Both are important trends in and of themselves, and also contributors to the digital revolution.

The next major trend is ‘Commoditization,’ the use of technology-enabled, global-enabled manufacturing systems to create a wide range of products and services at prices that were once inconceivably low.  This has occurred across the entire spectrum of economic activity, affecting not only mass market products, but also luxury brands; consumer goods, of course, and also business services and government.

The third trend is ‘Globalization’, the sourcing of goods and services from the lowest cost (as in cheapest) possible providers worldwide.  China’s trillion dollar surplus is but one result.

And there’s the wicked combination of all three.  When Digitization, Commoditization, and Globalization, the result is the inevitable force of Acceleration.  This combination speeds up the economy and puts tremendous pressure on the existing business models of every established firm, because new competitors can come into your market overnight and cause tremendous disruption to your existing business model.

Some examples?

• Digital music is wiping out the CD industry.
• Google has transformed global advertising.
• Social media are changing how we think about community.
• The purchasing patterns of Wal-Mart, Home Depot, and Ikea have transformed the face of retailing, with deep impacts across the global economy.
• Al Qaeda uses the internet to manage its global terrorism network.
• Farmers and fishermen in rural India use cell phones to track the weather, and determine which towns to are paying the best prices for their goods.

You probably already know all of these stories.  But do you also see that they are one story?  And do you see that this story is coming soon to have fundamental impact on your own business (if it hasn’t already…)?

Every successful new business model will necessarily and inevitably respond to these four forces.
Mapping them in detail is an important foundation for strategy and for innovation.

Consider:

• Are you a retailer?  Digitization, commoditization, and globalization are shaping the future your industry.
• Are you a manufacturer?  Same story.
• Are you in a service business?  Your next competitor may be in India, getting ready to enter your market.

No industry will be unaffected, nor will any company.

The overall theme we’re exploring is business model innovation, and hopefully it’s clear that these external drivers are the basis for many new business models.

Now that you’ve thought about the impact of these change drivers, and whatever other external factors may be critical to your company, that bring us to the customer’s experience.  That will be the topic for the next post.

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