A Business Model Innovation Overview

“Change is continuous and accelerating; the old strategies don’t cut it!”

-Rich Teerlink, retired Chairman/CEO Harley-Davidson

Is it getting harder to maintain price margins in your industry? You’re not alone. The recession is giving price Herculean power. Yet, even before the recession, price had become more or most important in most markets.

Traditional strategies to maintain margins: cost containment, product innovation, branding and marketing communications are becoming far less effective. Why? They do little to nothing to offset the multiple forces accelerating market commoditization and therefore price-competition:

• A plethora of business services organizations that enable almost any company to easily copy any other company’s offerings or capabilities, turning even high-end offerings and new-to-market offerings into commodities;
• Growing supply relative to demand as the internet eliminates barriers to entry and creates a global supply base in many markets, an excess supply made still larger by the recession;
• Stronger and stronger buyers due to industry consolidation and buying groups;
• Customers growing ability to extract lower prices due to the internet making auctions and price shopping so much easier.

Today, margins depend upon business model differentiation. In fact, business models have become the new basis of competition, replacing individual product or service features and benefits as the playing field on which companies win big or lose big.

All too often leaders think they are acting strategically, when in fact they are operating at varying levels of the tactical. Defining, innovating and evolving a company’s business model are the heart of leaders’ strategy work. The biggest mistake all too many leaders make is leaving their business model strategy decisions to history, industry practices or serendipity.

So what exactly is a business model? An enterprise’s business model captures how it creates value for a group of customers while, at the same time, creating profits for itself. Every company has a business model whether or not leadership articulates it.

The business model answers to five core strategy questions:

1. Who is our target market(s)?
2. What is the scope of our entire offering (including how you reach your customers and the nature of your relationship with them)?
3. What is our value promise that leads customers to choose our offering, where value equals benefits less the price paid to acquire these benefits?
4. What advantages make it hard for competitors to copy our value promise?
5. What drives our profitability?

Business model execution focuses on designing a culture and processes so that the organization consistently delivers on its value promise and has hard-to-copy advantages that keep its value promise unique. Leadership must also establish operating practices (such as a strong market understanding process) that challenge and change the business model as the external environment changes.

When leaders take their business model as a given, based on how others in their industry run their businesses they quickly find themselves in commodity-like markets. This is a formula for failure unless the company is the Walmart of its industry, the company with a business model that makes it the lowest cost competitor.

Behind any consistently successful company today and you’ll see a business model that:

• Offers a unique, relevant, hard to copy value promise
• Is aligned with market trends
• Is capable of generating attractive profits either because the enterprise is the lowest cost in its markets or offers unique benefits that competitors cannot easily copy

Every industry has a Walmart. If that’s not you, avoid becoming your industry’s Sears/K-Mart. Differentiate your business model. How strong is your business unit or company’s business model?

Learn more about business model innovation by reading my book Beyond Price: Differentiate Your Company in Ways that Really Matter (Greenleaf Book Group, 2009) or signing up for my new blog on business model innovation at http://www.plantescompany.com/blog/