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Business Models Universe

Posted on by Michael Kaufman

Photo Credit: Innovation Labs

If improved collaboration and business model innovation is the goal, and for most companies the evidence suggests that it should be, then we need a way to get there.

This post features a unique and powerful methodology created by InnovationLabs that we use with our clients to help them design their own Master Plan for Business Model Innovation.

In addition to a healthy dose of conceptual material that enables executives to grasp the full scope of what business model innovation really means, we’ve also developed a powerful set of analytical tools, exercises, and worksheets that enable executives to understand the key drivers of business model innovation, and then help them apply these concepts to develop business model innovations of their own.

There are 8 major elements in the toolkit:

1.  The Business Model Universe
2.  The External Drivers of Change
3.  The Customer Experience Model
4.  Core and Edge Markets Analysis
5.  Market Leader Analysis
6.  Competitor Analysis:  Jobs to Do
7.  Who Innovates?
8.  Putting it All Together: The Complete Business Model Innovation Package

In this blog post I’ll cover the first, and I’ll explain the others in the coming weeks.

1.  The Business Model Universe

To understand business model innovation, the first thing you have to do is to discover the underlying patterns that shape business strategy.   This means you need to see the patterns of economic change and the structure of industry competition across a wide cross section of the economy.

It may surprise you to find out that when you really dig deeply into the question, the successful business model innovators of the last few decades, the companies that so many of us admire, have really figured out how to do only two things better than their competitors.

Some of them have built market share and establish growth by expanding their markets as broadly as possible, bringing in more, and then still more customers.  As Wal-Mart has shown, the fastest way to do this is to lower the price.  The name for this underlying trend is commoditization, and it’s been the driver of success for many companies in addition to Wal-Mart, including firms as diverse as Dell, Home Depot, Ikea, Target, and Southwest Airlines.

The underlying insight is simple:  commoditize your market, or your competitor will do it to you.

Others grow by developing products and services that are more desirable because they are more and more differentiated. This route, increasing customization, is the path taken by companies like Starbucks and Apple in the mass market, or, at the high end of the luxury market, Bentley autos and Prada shoes.

Some companies, however, choose to neither commoditize or customize.  Instead, they stay exactly where they’ve been, but unfortunately this simply allows their competition to pass them by.  In this group we companies that are going or already have gone out of business, and the nearly dead ones, such as Sears, K-Mart, Circuit City, as well as GM and Chrysler.

There is a fourth option, the one that is by far the most difficult to achieve.  That is the sweet combination of growing the mass market while providing increasing customization.  In the very long history of commerce very few companies have been able to do this, but today one company has reached the top of the internet universe by doing exactly this:  Google.  How?

Google’s market is everyone; its service is free.  And the service it provides is utterly and entirely customized.

No wonder everybody wants to be Google!  Microsoft, Facebook, and Twitter are all claiming that they’ll be the “next Google.”  But Google wants to be the next Google too!

Together, these four business models help explain nearly everything that’s been happening in a wide swath of industries, including advertising, air travel, autos, banking, entertainment, fashion, financial services, fast moving consumer goods, media, retail, technology, and a great many other B2C and B2B industries as well.

Locating your own company and your competitors in the Business Model Universe is an important first step in becoming a business model innovator.


From an earlier article by InnovationLabs leaders:

HOW TO CREATE A WINNING BUSINESS MODEL

As a critical source of competitive advantage, innovation certainly deserves the attention it receives.  But innovation is also notoriously difficult to manage.  And while recognized innovators are widely admired for their achievements, every business leader knows that the pursuit of innovation is exceptionally challenging even as it is entirely necessary.

The roots of the problem lie in the fact that innovation takes place at the crossroads of two critical uncertainties:  uncertainty about the future, and uncertainty about what will be best for our organization.

Given these issues, executives face two key questions:

    * First, What innovations should our organization be pursuing?
    * And second, How should we create them?

We respond by noting that among the four types of innovation that any firm could pursue (more detail on this below), business model innovation should be highly attractive and pursued aggressively.  Why?  Because business model innovators are earning very attractive returns on capital, and finding new market opportunities that others have overlooked.

But business model innovation is also widely misunderstood, and consequently few organizations are reaping the significant benefits that can come from doing it well.

We’ve been thinking about this for some time, and working to understand why business model innovation may be important for every company.  We’re also working on a systematic program to organizations develop breakthrough business models of their own.
Four Types of Innovation

Organizations typically must allocate their innovation investments among four types of innovation:  incremental, breakthrough, new venture, and business model. (This is spelled out in considerable detail in Permanent Innovation.)

•  The purpose of incremental innovation is to maintain market share.  But it’s a maintenance strategy, and rarely confers much of an advantage.  It’s necessary, to be sure, but by no means is it sufficient to support growth.
•  The search for breakthroughs offers a shot at stardom, but as they are quite rare, pursuing breakthroughs is a properly recognized to be a high risk approach.
•  Successful new ventures can position a company for the very long term, but they are also high risk, capital intensive, and for good reasons they are rarely attempted.
•  In today’s business environment, this leaves the fourth option as the most attractive:  business model innovation can be not only the most cost-effective form of innovation, but for most firms it’s also the most promising route to success.

Recent research by IBM has shown that business model innovators are earning the most attractive returns on innovation investment, and also achieving the best rates of growth.

In fact, if you look at the most successful and admired companies of the last twenty years, you see that most of them have focused on developing innovative business models.  What company would not want to be included on this list of business model innovators:  Amazon.com, Apple, Costco, Fedex, Google, Ikea, Southwest Airlines, Starbucks, Wal-Mart, and Zara are 10 of the world’s most successful companies, and business model innovation has been the key to the success of each one.
Defining Business Model Innovation

But what exactly is a business model?

At its simplest, a business model simply describes how a company makes money.  It’s the products and services it offers, the way it delivers them, and through these elements it is the experiences that it creates for customers.

Business model innovators just find ways to create better experiences for their customers, and as a result of doing so the most successful among them earn profits that others did not recognize as even possible.

For example:

    * Google discovered how to sell words at auction, a new business model that transformed the company into the world’s number one advertising agency, and soon thereafter into one of its most admired companies.
    * Amazon.com developed a new business model for selling products online, has radically reshaped the book business, and is now working to extend its model into every market.
    * Apple found a tremendously successful way to sell songs through iTunes, permanently reshaping the music industry.
    * Fedex set up a system that delivers packages for ten to fifty times more than the Postal Service charges.
    * Southwest Airlines sells airplane tickets for less than its competitors, but it has nevertheless been the most consistently profitable US airline for two decades.
    * Wal-Mart, Costco, and Ikea, meanwhile, developed global manufacturing and supply chains that enable them to sell enormous quantities of products at prices once thought unattainably low, undercutting their competitors and redefining the very nature of retail.

To reiterate the point made above, the core of each success is that these companies found new ways to earn profits by providing their customers with new and better experiences.

Further, the experiences provided by their innovative business models have resulted in enduring relationships that transcended traditional boundaries between customers and companies, and as a result each transformed the industry in which it competes, permanently altering the competitive landscape while becoming a renowned leader.

If business model innovation is the goal, and for most companies the evidence strongly suggests that it should be, then we need a way to get there.

InnovationLabs is developing a set of analytical tools, exercises, and worksheets to help our clients develop a true master plan for business model innovation.  (Our complete set of innovation worksheets now numbers approximately 100 exercises.)

This process of 8 steps enables executives to understand the key drivers of business model innovation, and to apply them to develop business model innovations of their own.

   1. The Business Model Universe
   2. The External Drivers of Change
   3. The Customer Experience Model
   4. Core and Edge Markets Analysis
   5. Market Leader Analysis
   6. Competitor Analysis:  Jobs to Do
   7. Who Innovates?
   8. Putting it All Together: The Complete Business Model Innovation Master Plan

•••

In future posts I will be expanding upon the process and these 8 steps. If you have any thoughts or comments on the importance of business model innovation in your industry, or on the process steps mentioned here, I would love to hear from you.

This is also the topic of my current book project, The Innovation Master Plan:  How to Create a Winning Business Model. Please click on this link to go to the page where I am posting portions of the work-in-progress and inviting reader feedback.  Thank you!

 

Content created and originally posted on www.InnovationLabs.com

InnovationLabs is recognized as one of the world’s leading innovation consulting firms.  We bring the many dimensions of innovation together into practical understanding and meaningful action.

To learn more about Innovation Labs, visit their website or read more about them in Collaboration King's collaboration consulting guide.