Business Model Theory is powerful because it can predict which initiatives will succeed and which ones will fail inside a given organization. It defines a business model as four interlocking elements that, when taken together, create and deliver value: value proposition, resources, processes, and profit formula/priorities.
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You’ve thrived as a college or university for more than a century. Your students are high achievers, faculty are tenured experts in their fields, and you’ve consistently delivered on your mission to prepare students for the workforce. But over the last 20 years, you’ve noticed drastic changes: declining enrollment, alumni struggling to land jobs after graduation, and news headlines filled with families skeptical of the value of traditional postsecondary education. After 100 years of having a sustainable business model, your customer base is disappearing. How do you respond?
Whether you’re at the helm of a university, a healthcare company, or a for-profit or nonprofit organization, most leaders assume they can pivot easily when circumstances change by simply adding or changing resources or processes. That might buy time in the short term, but in the long term, your value proposition—the specific promise you’ve made to stakeholders and customers about how your product or service will help them solve a problem—cannot change unless your business model changes. Survival in a drastically changing landscape requires long-term transformation, and that means creating a completely new business model.
Harvard Business School Professor Clayton Christensen developed business model theory to explain the four interlocking systems that determine whether an organization will succeed or fail. First, there is the value proposition: the specific promise an organization makes and delivers to its stakeholders. Next, resources: the tangible and intangible assets required to deliver on the value proposition. As an organization works to deliver its value proposition repeatedly and effectively, processes emerge—methods and procedures used to transform resources into outputs. Finally, there is the profit or revenue formula: the financial model that outlines how revenue is generated, costs are managed, and profits are maximized to keep the lights on.
If stakeholders call for changes to your core value proposition, innovations will succeed only if they fit into the existing business model. If an innovation creates friction with existing resources and processes or hurts the revenue formula, it will fail. To remain competitive when market demands shift, organizations with established models can either improve with sustaining innovations or transform by using autonomous business units to create a new business model free from the influences and constraints of the current one.
When people talk about disruptive innovation, they’re often referring to a new business model powering that innovation—one that looks quite different from the status quo. Here’s an example from higher education. Western Governors University (WGU) is a nonprofit, online-only college that serves learners otherwise shut out of the traditional system. Most students receive their bachelor’s degree in two and a half years, learning not from faculty focused on research but from a team motivated by student outcomes.
Compare WGU’s business model with a traditional higher education model. In traditional higher ed, high school graduates enroll in a physical campus, sign up for classes taught by faculty primarily rewarded for research rather than student learning, and progress toward graduation is based mostly on completing credit hours, not mastery of material. The result: campuses with low economies of scale, high fixed costs, and rising tuition.
WGU’s model stands in stark contrast. It offers an online-only experience. Faculty who design courses are experts in teaching and learning, and instructors focus exclusively on student progress. Students move toward graduation as they demonstrate mastery, not based on time spent in class. This allows students to progress faster, while WGU invests in scalable experiences that keep tuition affordable and outcomes-focused. By doing this, WGU is disrupting higher education with a coherent business model that increases access, improves learning outcomes, and lowers costs. Its bottom line is connecting talent to opportunity.
This example demonstrates why incremental improvements to a traditional business model are often insufficient in rapidly changing circumstances. Changing one aspect of a business model creates ripple effects across the others, which is why 99% of efforts deemed disruptive fail within incumbent business models.
This barely scratches the surface of business model theory. To learn more, visit ChristensenInstitute.org/theorybusmodels.
