What are Business Model Innovations?

By B. Ellie Jin

In the fashion retail industry, many traditional retailers employ a forecast-based, inventory-driven push-supply-chain system. A push-supply-chain system means that companies make products based on their predictions of consumer preference in the distant future rather than current customer demands, an approach called a pull-supply-chain system. Many fashion companies adopt the push system mainly because it takes months to manufacture products and put them on the shelves, owing to a long supply chain that can span across multiple continents and countries.

The predominant push system often results in huge gaps between forecasted and actual consumer demands. The gaps can lead to heavy markdowns and excess inventory that not only erode retailers’ profits but also harm the environment as much of the excess inventory end up in the landfills. Good news is that there are emerging innovative business models that successfully combat these long-standing problems in the retail fashion industry.

In a paper published in Business Horizons in 2020 – titled “Changing the game to compete: Innovations in the fashion retail industry from the disruptive business model”, Dr.  Byoungho Ellie Jin and Daeun Chloe Shin at Wilson College of Textiles analyzed three different disruptive business model innovations that effectively address the issues surrounding inventory management: 1) born-digital brands, 2) artificial intelligence (AI)-enabled demand forecasting and product design, and 3) collaborative consumption. Before diving into the specifics of three disruptive business models, let’s take a look at what it means by business model innovations.

First, any business model includes three components: value creation, value capture, and value delivery. Value creation is about creating value to consumers, in terms of products and services. Value capture is about how a company makes money from the value they create. Value delivery is about how the company deliver the value. For example, most fashion companies create value by offering brand-new products and capture value by charging for the products. They deliver value (i.e., brand-new products) by distributing them online or at offline stores.

Business model innovations make radical changes to one or more of the three components of business models. A company can offer novel value to consumers and/or change how they capture or deliver value. Let’s say that a fashion brand offers the value of personalized curation of products and deliver the value with human stylists who manually curate items for an individual customer. The brand can innovate how they deliver the value by automating the curation process using artificial intelligence technology. Another example is introducing new value to customers by offering a rental service in which they can rent a brand’s collection for a fixed fee, which will be a new source of profit for the brand (i.e., value capture).

In sum, business model innovations disrupt the industry by redefining what an existing product or service is and how it is provided to the customer. It is different from product or process innovation, which indicates discovering new products or implementing a new production method or process.

In the next post series, we will take a look at the aforementioned three business model innovations one by one. We will find that all of these models address fundamental needs unmet by current business models, such as offering quality products at a competitive price, curated services, and sustainable consumption. At the same time, all three disruptors suggest effective operating models for handling demand uncertainty, inventory management, and timely responses to the market, all of which are inherent issues for current push supply chains and forecast-based, inventory-driven systems.