Short-term competitive advantage is created by exploiting existing business models. However, in the long term, all markets mature, competition intensifies and turbulence increases. Consequently, new sources of growth must be explored, and fresh answers to enduring success must be found. The answer used to be innovate or die. But research shows that pouring more money into pure product innovation does not lead to improved performance. We need to dig deeper.
To succeed in innovation and to seize new opportunities, the scope of innovation must be expanded to encompass the full business model, and new processes must be mastered. How can an innovative business model be linked to customer value creation, define growth opportunities and present key success factors to exploit the potential of business model innovation?
Not all business models are created equal, and some key factors must be considered when evaluating different design options. A delighted customer is the ultimate goal of your business model, but to survive in the long run as a business, the challenge is not just creating customer value, but capturing value as well.
To capture value, your business model design must provide a high degree of protectability through either legal or natural barriers. Legal barriers could be patents, trade secrets, copyrights or non-disclosure agreements. Natural barriers could be difficulty in reverse engineering your offering, switching costs or tacitness of relevant technology.
To capture value, you must also have some degree of control over so-called complementary assets. Such assets are for instance manufacturing capabilities, an effective distribution setup, a portfolio of strong brands, innovative services and leverage of shared technologies. In other words, the strength of your protection mechanisms and supporting assets will determine your ability to capture value.
At the end of the day, great business models are based on solid financial models.
To support your efforts in discovering the right financial model, consider some of the questions below:
- Do high switching costs create effective lockin of customers?
- Can you easily scale your business model?
- Does your business model produce recurring revenues?
- Can you design the financial model so that you earn before you spend?
- Is it possible to exploit a partner network to reduce your costs and risk?
- Does your business model exploit protection mechanisms?
- Can you take advantage of existing assets and capabilities?
- Can you redesign the cost structure to change the rules of the industry?
- How can you rethink the in and outflow of cash throughout both development and launch of the business model?
Altogether, new business opportunities are discovered at the intersection of four knowledge perspectives: customers, context, competition and capabilities.
Know your options before innovating. A broad and diverse foundation of knowledge simply makes it easier to be both innovative and goal-oriented. However, the deep dive into emerging technologies, latent customer needs and inspiring business models should always be timeboxed and balanced with the innovation challenge at hand. There is no need to boil the ocean to design a simple service business on top of a product line. But bold moves do require a decent amount of knowledge and inspiration upfront.
The bottom line is that analysis must always serve a purpose and enable you to challenge world views. That also means that research efforts guiding business model innovation must be designed to build surprising hypotheses as opposed to just testing and validating predetermined hypotheses. Without the will to deconstruct orthodoxies, a desire to scan the periphery and proactive leverage of analogies from distant business models, your innovation success will be based on pure luck.
We have to question our assumptions to change the rules of the game.
Ask yourself if you have a strong learning orientation and proactively manage high-risk opportunities with the goal of learning as fast and cheaply as possible.
Altogether, these principles should inform and guide all business model innovation efforts, and, obviously, the importance of the principles is correlated with the level of risk. On the other hand, all innovation activities and growth initiatives can benefit from gaining a fresh perspective from business model thinking and from rethinking your business model through the lens of discovery-driven innovation.
In a world characterised by exponentially increasing turbulence, expanding your innovation horizon to encompass the entire business model is timely and needed for gaining long-term competitive advantage. However, to stay true to the principles, we should not get caught up in too much theorising, but just do it and learn along the way.
Close the laptop, get out of the building and learn from your customers to discover your future business models!