Why Business Model Innovation is Critically Important Today

One of the few ways left for companies to protect their margins is through business model differentiation. According to Kay Plantes, business models have become the new basis of competition, replacing product features and benefits as the playing field on which companies emerge as dominant or laggards.

Is it getting harder to maintain margins in your business? You’re not alone. Excess supply in most markets made it hard to raise or hold prices even before the recession. The recession and slow recovery have only worsened the situation.

What’s more challenging is that traditional strategies to maintain margins: cost containment, product innovation, branding and marketing communications are far less effective today. Why? They do little to nothing to offset the multiple forces accelerating market commoditization and therefore price-competition.

Copycat competition: A plethora of B2B service organizations are enabling almost any company to easily copy any other company’s products or services, turning even high-end offerings and new-to-market technologies into commodities.

Globalization: Growing supply relative to demand coupled with fewer barriers to entry, thanks to the Internet, is giving businesses more new competitors from across the globe.

Herculean buyer power: Industry consolidation, national big box stores displacing local retailers, and B2B buying groups are concentrating buying power in fewer purchasers who use internet enabled auctions and sophisticated Request-for-Proposal processes to extract the lowest prices from their suppliers.

Price Transparency: It’s easier than ever for customers to compare prices thanks to the Internet and mobile technology.

Loss of messaging control: Customers have more control over if, when, and how they are exposed to a company’s messages, and are more likely to form their impressions based on sources a company cannot control.

They mistakenly leave their business model strategy decisions to history, industry practices or serendipity, a mistake they later regret.

As a result, the only way to protect margins today is through business model differentiation. In fact, business models have become the new basis of competition, replacing product features and benefits as the playing field on which companies emerge as dominant or laggards.

Defining, innovating and evolving a company’s business models are the heart of leaders’ strategy work. Yet all too often leaders think they are acting strategically, when in fact they are operating at varying levels of the tactical.  They mistakenly leave their business model strategy decisions to history, industry practices or serendipity, a mistake they later regret.

When a leadership team fails to evolve its business models, they quickly find themselves in commodity-like markets.  This is a formula for failure unless their businesses are the Wal-Mart of their industries, the company with a business model that makes it the lowest cost competitor, profitable competing on price.  If that’s not you, avoid competing with a Wal-Mart on its terms. Innovate your business model.

So what exactly is a business model? A business model captures how a business creates value for a group of customers while, at the same time, creating profits for itself. Every company has at least one business model, whether or not leadership articulates what the business model is all about.

The business model answers five interdependent core strategy questions

  1. Who is our target market and how do we reach and relate to its members?
  2. What is the scope of our entire offering and what is outside our scope?
  3. What value promise leads customers to choose us, where value equals benefits from working with our company less the price paid to acquire these benefits?
  4. What advantages and partnerships make it hard for competitors to copy this promise?
  5. What factors ensure our profitability in delivering on our value promise?

In larger and more complex companies, serving multiple target markets and often participating in multiple industries, multiple business models exist. Leaders must decide what will be leveraged company-wide (e.g., corporate R&D), division-wide (e.g., divisional HR) or business unit wide (e.g., manufacturing) across business models.  These strategy decisions – which drive organizational structure and resource deployment – are much better informed when using a lens of business model innovation.

Business model execution focuses on designing a culture and processes so that the organization consistently delivers on its value promises and has hard-to-copy advantages that keep its value promises unique. Process design is a critical part of this work.

Business model innovation embraces many different types of changes to an existing business model. These can run the gamut from incremental to transformative. The changes can be proactive or forced by competitors. Effective leaders establish operating practices and a strong market understanding process to evolve their business models proactively as external environmental changes unfold. Smart leadership teams recognize that different kinds of leaders are best positioned to lead different types of business model changes.

Behind consistently successful companies you’ll find business models that:

  • Offer a unique, relevant, hard-to-copy value promise
  • Are aligned with market trends
  • Are capable of generating attractive profits either because they create the lowest cost structure or generate meaningful benefits that competitors cannot easily copy
  • Establish new growth platforms

Never forget that in a free market economy, every industry has a Wal-Mart. If that’s not you, avoid becoming your industry’s Sears/K-Mart. Differentiate your business models before its too late. And if you are the Wal-Mart of your industry, watch out for your industry’s version of Amazon, Tesco and Dollar Stores who are coming after Wal-Mart’s low cost position with advantages Wal-Mart can’t easily copy.

By Kay Plantes

About the author

MIT-trained economist Kay Plantes is a strategy consultant and author of Beyond Price: Differentiate Your Company in Ways that Really Matter (Greenleaf Book Group, 2009). She writes a blog on business model innovation at plantescompany.com/blog.

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  • Stephen Sweid

    It is easy to make assumptions and untested conclusions, e.g. the only way is BM differentiation … , people can copy any product etc, but the reality is quite different. People tend to get carried away by the business model concept and the blue ocean strategy etc, and tend to overvalue such new concepts and undervalue other approaches. I believe one should test things on the ground before generalizing, as this might implicate many people. I am for innovation in the business model, and appreciate the role, but it should remain within context.

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