The half-life for a competition to bridge the gap in features is a few months at best. This is even so true for manufacturing-intensive industries, where low-cost offshore manufacturers are easily accessible and a prototype can be drawn-out in weeks' time. The proliferation of open source has made technology, however disruptive, easier for the competition to replicate. For example, OpenAI recently lent free commercial access to its language model GPT3, and no sooner, there are companies (e.g., copy.ai) creating products with GPT3 at its core.
The excitement with business model innovation is that it helps businesses to be innovative without a ground-breaking product. Almost all the start-ups of the day are not radical technology innovations, but re-inventions of how existing services are delivered fast, cheaper, and at a better quality.
Old-economic models practice build, scale, and launch, which are capital intensive and time-consuming. But when done right, is very hard for competition to crack that wall. What this creates, more often than not, is a wall of isolation, laggardness, and a risk-averse tendency to keep re-inventing and experimenting with new strategies — the very much that would’ve gotten a company there. The brighter side? the walls will last only as long as an agile competitor comes up with an innovative business model that reimagines the whole business; technology is only an aid to this re-imagination. Case in point: of the Fortune 500 companies in 1955, only 60 remain on the list today.
Would Blockbuster have survived had it re-imagined its business model of delivering movies to its customers? Netflix did that and it eviscerated blockbuster. Netflix started in 1997 as an online DVD rental store, which was still a disruption in the then industry dominated by brick and mortar DVD stores. Netflix realized its existing business model was unsustainable comparing with the massive online video platforms and the customer's gravitation to it. Debating between an online streaming service or a hardware device designed to download movies overnight, Netflix made the streaming call and became what it is today.
It is always easier said than done. How should organizations realize how and where to innovate their business model?
Business models collectively define Revenue, Delivery, Cost, Risk, and the choice of target customers. When one or more of these dimensions can be refined and re-imagined, innovation comes forth. Xerox famously pioneered the subscription model. When Xerox introduced its machines, it realized the machines were too costly to convince customers to buy. In order to drive adoption and reduce consumer risk exposure, Xerox decided to lease their machines free of cost and charged customers $0.04 per copy after their first 2000 copies. Xerox also handled all the services and support for these machines further reducing capital and risk exposure for customers. By changing its revenue model from one-time sales to a monthly continuous revenue based on usage, Xerox’s revenue grew from $30 million in 1960 to $2.5 billion in 1972.
Improving existing business models though is not enough. To be not misunderstood with innovation is improving efficiency. Reducing cost can bring some extra to marketing, R&D, or as added profit to the balance sheet, but this will not re-define industries.
Dell sold computers through retail intermediaries initially but soon realized, to scale and sell more computers at an economic price, it needed to bypass the middle-men and so launched its direct-to-consumer purchases. By doing so, Dell reduced its costs and passed on the benefits to its customers; a business model that has as well found takers in other industries too— car manufactures(Tesla), mobile phone manufacturers(oneplus and et al.)
Improving efficiency and cost savings are innovations only when they are achieved through re-imaging the existing organizational structure and revenue stream.
A business plan of build, launch, and, scale that finds its reliance on product features is an “adaptor”.
- Finding new business models needs re-imagining in both value proposition and in the operating model. Solar panel prices have been coming down considerably in the late 90s and into the naughts but it only found its watershed moment when Greenzu, a solar company, introduced the “Zero money down” plan, where it leased and managed the panels for its customers without a down payment. It was this differential business model that led to an exponential increase in the solar roof-top installation; customers paid the company for the electricity consumed off the installation.
- Instead of the de facto, a new business model can come from formulating various hypotheses of how a company can create value for itself and to its customers. In the future, once autonomous vehicles are legalized and become mainstream, it is highly possible auto manufacturing companies will largely be autonomous taxi leasing services companies because the cost then of accessing a taxi will be exponentially lower than that of owning a car.
- Building off the hypotheses is the need for empirical evidence which can come from customer discovery before building the product. In the course of reaching out to the “hypothesized” customer base before sales, the assumptions in the target customer base find their corrections and existing target customers can either be removed or new ones added. Also comes in this due course of customer discovery is the validation to other assumptions in cost, pricing, and distribution channel, that make a business model.
Business model innovations create competitive advantages by enabling a more comprehensive differentiation and greater influence on a company’s sales and costs than product or process innovations.
An experimentative, lean start-up principle and a culturally defined appetite for risk with the freedom and responsibility within the company to make decisions is the answer to becoming mavericks and re-inventors than being an adapter.
