While many brilliant ideas come from start-ups with unsustainable business models, well-established firms suffer from an inability to innovate, especially in regulated industries. The innovation paradox can be overcome by applying the right business model: 1) Fun & Games, which ignores regulations; 2) Hide & Seek, which exploits regulatory ambiguities; and 3) Carnival Rides, which requires full regulatory compliance.
The Innovation – Profit Gap
Barriers to entry decrease daily as technology becomes cheaper, key infrastructure moves to the cloud, and digital platforms make it easy to develop apps and sell physical products. Ease of entry, combined with the growing mantra of “fail fast and fail often”, is creating a flurry of entrepreneurial efforts. Many digital ventures, however, launch a product or service before developing a way to create profit. For every big success, countless entrepreneurial tech ventures go bankrupt and thousands survive, but never thrive.
Although elite firms such as Netflix, eBay, and Zynga have successfully monetised their innovations, many innovations launch without a business model and the dangerously vague “build it and profits will follow” mindset. For all its popularity, YouTube remains a perennial money loser that survives only through subsidies from its parent Google.1 Twitter continues to lose money, with aggregate losses exceeding $2.5 billion.2 Other build-then-monetise firms find profit by radically redefining their core business models, such as Facebook, which transformed itself from its original business as an online advertising venue to an Internet-wide intelligent ad serving service.
While many start-ups driven by brilliant ideas suffer from poor or absent business models, well-established firms with proven business models often suffer from an inability to innovate.3 This is especially true in industries that face heavy regulation.4 Firms in regulation-heavy sectors such as healthcare, finance, and telecommunications are often slow to bring innovative products and services to market. The regulations present many constraints; however, much of the innovation shortage can be overcome by applying the right business model. This article introduces a business model framework for launching innovations in highly regulated environments…