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Business Model Strategy
Business models drive strategy. These posts are all about how business models are the beating heart of modern corporate strategy. The focus is on the theory of business model strategy, not on how to design business models.
The Need for Business Model Strategy
If you have the same business model as other businesses in your market you are stuck in competition. Your success is driven by luck and the semi-random variation in staff quality, product innovation and access to resources.
To compete successfully over the long run, and to create a sustainable competitive advantage, you must have a different business model.
The design of your business model thus influences the strategies that you adopt, where you choose to play, the culture that your business has and the types of products and services that you create for your customers.
If you want to win, you need a different business model. You need a better business model. These posts give you the strategy to create powerful new business models.
More than 100 Posts
There are over 100 posts on business model strategy covering the business model lifecycle, how business models emerge and die. We look at normal business and revolutionary business drawing on ideas from Thomas Kuhn.
Large numbers of business models emerge at the start of an industry. An evolutionary process whittles these down. By maturity, few business models survive (often two or three families). As the environment changes these become vulnerable to disruption by new business models
I draw on modern and historical examples to illustrate my points, often going far beyond academic research. The theories and strategies that I describe are deeply rooted in my own entrepreneurial experience. They are supported by the work I have done over the last 20 years; coaching, mentoring, consulting and advising entrepreneurs and business leaders in dozens of industries and sectors.
To Help Create a New Era in Business
The aim of all these posts is to help you learn how to explore new business models. You can then experiment and adopt new business models. My hope is that this will give birth to a huge flowering of diverse business models which will be critical to economic growth through the 21st and 22nd centuries.
Sun Tzu said, "Fight where the enemy aren't". Business model strategy helps you to build business models that disrupt the enemy without fighting and build an empire on their shattered bodies
I was talking to a VC this morning about accelerator design. I mentioned that Gene Frizzell, MBA, M.Ed. and I had identified over generic 500 steps that a startup needs to take between ideation and Seed.
Each of these takes time to understand, time to apply, and time to deliver. Lots are skipped of course.
There’s a correlation between the number successfully completed and the chances of success.
When we design accelerators we spend a small amount of time on a small number of these.
This really raises awareness. Nothing more
The key problem is the founders’ ability to learn, understand and implement quickly.
The faster they can do this, the greater their chances of success. Mentors obviously help to accelerate this, as does networking and accountability.
This is the real reason why accelerators haven’t really had the impact that was hoped, and why the startup success rate hasn’t budged much over the last 20 years
One entrepreneur that I worked with a while back wasn’t worried about time. He’d sold a startup in the early days of the internet for a big figure. Then had spent the next twenty-plus years working on his dream project. It wasn’t going anywhere fast, but it didn’t need to in many ways.
During the financial crisis my startup hit the wall as customers went bankrupt and often our life expectancy was measured in days as we scrambled to find the cash to extend that.
In startups everything is about time. Every problem is solvable if you spend decades on it (some caveats). Everything that you are doing is investing in something that reduces the time that you need or extends the time you have available.
Will it get me to product market fit faster?
Will it extend the time that I have to find product market fit?
Pretty much every decision you make as an entrepreneur can be looked at through those two questions.
You should get a simple and quick YES. If you can’t then you need to think more about what you are doing 🙂
Photo: Open water swimming near St David’s Head – Wales
Today we’re going to look at capturing your value proposition on the business model canvas. So far we’re showing the problems that we want to solve and the people who have them. Today we’re starting to move on to solutions – otherwise known as value propositions.
This is always a challenge in real life.
‘What problem are you solving ‘ I ask
‘We make widgets that enable you to go faster than light’
‘But why? What’s the problem?
‘What do you mean?’
If there’s not a problem-solution fit, it is SO difficult to grow a business. Trust me I’ve tried multiple times over the years.
Adding your value proposition to the business model canvas
I’m going to dive right in and put ‘Design business models’ down on the example business model canvas for the value proposition.
Here we add a value proposition onto the business model canvas
Is this right? Well, not exactly. It’s not that simple, but there’s a reason why we have about 10% of the business model canvas to write our solution on. Most people will take pages and pages, and write down too much.
Here we are focusing on the big picture. Capture in a few words how you solve the problem. A useful way of looking at it is to think of the problem as the why.
Why are we here? To solve the problem of businesses dying because they don’t have the right business model.
What are we going to do? Help them to design better business models.
How are we going to do it? Writing a daily blog post on how to do it and posting it on LinkedIn. That’s too much detail.
You can break it down a little bit more. Here’s an example.
Add more detail to the value proposition business model canvas
I mentor leaders, I advise companies on how to design disruptive business models, and I educate as many people as I can through blogging, videos and public speaking.
On the canvas, these value propositions appear as Mentor, advise and educate.
The value proposition is expanded for clarity – this is what we will do. The next level of expansion is how to do it – but that is too detailed to fit on a business model canvas
When I’ve worked with companies figuring this out I’ve found that if there is a lot to write here and it all seems important, there’s usually more depth that you haven’t uncovered. If you can’t take the value proposition to the customer and have them understand almost instantly it’s an early signal that you haven’t got a problem-solution fit.
If the value proposition (or group of value propositions) are so complex that it takes time to explain then you aren’t working at the right level of detail.
Testing the value proposition again customers and the problem
We need to run tests. Test 1 checks to see if the value proposition does what the customers need. Test 2 checks to see if the value proposition solves the problem
There are two tests to run at this stage.
Is the value proposition clear to the customer at a high level? We want them to ask ‘Do I need this?’ not ‘What is sie talking about?’
Does the value proposition solve a problem for the customer? Does it solve THE problem that we’ve already written down?
Let’s try this now.
I design business models for companies.
That’s pretty clear. The listener may not know what a business model is but the grammar is in a clear form so even if they need more, they can get 90% of the way themselves.
At the next level down, Denis designs business models for companies by advising, mentoring and educating them. Again it’s pretty robust.
Now for the second test.
Does this value proposition solve the problems that we care about?
If a company needs a business model because its old one isn’t working, will designing a new business model solve the problem.
A qualified yes. A new design is useful, perhaps critical, but they have to do something to change the company from how it is now, to where needs to be. The same logic applies to the other segment.
Iterate the problem, customer and VP until you get a fit
What do we do here? There’s a choice. You can tweak your value proposition so that you solve the problem in full. We could change my value proposition to ‘Transform business models’ or ‘Design and build business models. The value proposition is then promising to solve the whole problem.
Alternatively, we revise the problem or the customer segment to improve the fit.
Let’s try changing the problem. Companies that need to change their business models but have no skill/experience in designing new ones. That would work. We need to go back and validate this narrower problem definition
Alternatively, we narrow the customer segment and target companies who have failing business models but are competent in organisation change and transformation. That way if our value proposition is to design new business models they can then implement them.
If we fail the tests then we iterate, we change the customer segment, the problem and the value proposition until it works.
As you can see this is a highly iterative process. As we add more pieces in we keep having to make small changes and adjustments.
[note: it’s always worth using the value proposition canvas to do a deep dive into the design of the value proposition]
I have never done a business model where we sketched it out and got it right the first time. By continually backchecking how the pieces fit together, like a jigsaw we’re asking lots of how what and why questions that increase our knowledge and understanding very quickly.
Going further when you have gaps between the value proposition and the problem you are solving, or what the customer wants, can seem attractive. You don’t have to do lots of rework. There’s always a big cost later as your marketing and sales don’t deliver the numbers you expect.
Last week I was invited to a SartupGrind talk by Sir Martin Sorrell. He’s the chairman of WPP, the world’s largest advertising agency. He’s taken a company that made supermarket trolleys and turned it into a $20 billion company.
That’s pretty good, isn’t it? It’s certainly better than most people have done.
It’s a classic business model disaster.
What was the advertising business model?
Let’s shift back a few decades and look at what advertising agencies did. They helped clients figure out how to get a response from consumers. This worked because the agencies were able to get and retain creative talent that the big FMCG companies (people who made the stuff you buy in shops) couldn’t.
Back in those days, most advertising went through an agency in some way, shape or form. So who would it be better to talk to the future of advertising with? An agency owner like Sir Martin, or someone else entirely.?
When digital came out marketing agencies gave us some cool (irony) banner ads and all sorts of spam. They charged their corporate clients a lot and headed on a path to the $20 billion valuation. The business model remained the same. Stay between the people who make stuff and the people who buy it. Trade our knowledge of consumer behaviour for sales and profits that grew each year.
That’s very straightforward, very logical, applies all the known business rules, and is also very profitable.
But incredibly wrong.
Growth with blinkers
What happens if instead of being the middle man between the consumer and large corporates you start asking questions like:
How could we help all companies with their advertising?
How can we reduce the costs of focus groups and market research by 100x?
How can we figure out which marketing campaigns actually are effective?
WPP didn’t go there. The question didn’t occur to it, or to any of the other big advertising agencies. The business model worked. They were safe and happy. Nothing to see here, move along.
Advertising with a perceptual shift
A couple of computer scientists saw things differently.
They essentially asked the questions
How can we allow anyone to advertise as effectively as the largest consumer goods companies in the world?
How can you, as a small business owner, get the same or better results as an advertising agency?
How can you spend your money on stuff that works without facing huge bills and ruin if a campaign doesn’t deliver?
The answers to these questions – very different ones than the traditional advertising agencies and their clients were asking – came up with a very different business model.
That business model valued the company at almost $2 trillion in 2021. That’s over 100 times more valuable than the company that Sir Martin built up over 50 years.
The company is Google.
Business model innovation and perceptual shift
Why is this example important?
Transformative business models require a perceptual shift for them to take off. Applying business logic is important but not enough
Google saw the world differently. It made a perceptual shift. It saw the world differently. Assume that Larry Page and Sergei Brin had worked for WPP. Would or could so much value have been created? Almost certainly not because there wasn’t the mental flexibility to look at the world in a totally odd way – one that did not compute based on all the business data that WPP had.
The takeaway here is that
Using standard business logic is powerful, but it significantly limits what you can achieve.
To find breakout sources of growth the key is to look at the world in a fundamentally different way
When you are designing a startup, new venture or business transformation and diving into business model innovation – this should be a key aspect of the process.
If you simply apply normal business logic to new data, to innovation, to transformation, you end up with similar types of business coming out. Execution can be awesome, as in the case of WPP. But you leave so much cake on the table it’s as if you never even got to the party.
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In many industries, there are only a few types of business model. The lack of business model diversity leaves the industry and the businesses in it vulnerable to technological and environmental shocks.
Most industries have a few standard business models
Let’s jump straight in with a few examples. Airlines have Longhaul operators like British Airways, Low-Cost Carriers like SouthWest and Air Asia and Flag Carriers like Garuda. Most airlines fit into one of those three models.
Fastfood restaurants have single operator non-branded business models and franchised chain operations like McDonald’s and KFC. Logistics has shipping companies and NVOCCs. Car companies beyond speciality marques use a part assembler & franchise distribution model. Enterprise software uses on-site server/user licences and cloud-based SaaS models.
In most industries, if you map out your competitors business models using the business model canvas there will be a significant similarity between them. The differences are usually concentrated in what you are selling to who. For example, different lawyers may sell to people getting divorced and to people needing trusts and wills (two different customer groups) and have slightly different value propositions – but everything else remains the same.
This is a problem as it makes you vulnerable to change
Why is this a problem?
In normal times it isn’t. If a lawyer is making money in the next town over it seems likely that if you copy hir business model in your town you will make a similar amount of money (quality of the operations and town demographics being similar).
Through most of the twentieth century, this is what has happened. Some very successful business models spread widely and were almost universally adopted in some industries. Alcohol sales through pubs in the UK. Fish and chips being sold via the chippie on every high street. Milk being sold by dairies via milk floats.
Let’s take pubs for an example. In 1970 just before I was born there were over 75,000 pubs in the UK. Now there are less than 50,000 despite the population growing by 20% and becoming far wealthier. 30% of the businesses died because they weren’t able to adapt to supermarket alcohol sales and the rise of the mass market restaurant model. Their business models were not diverse.
Today the pub model has fragmented into lots of sub-models. Gastropubs, family-friendly pubs, post-work pubs, pre-club pubs and more. The underlying models are still very similar. Sell beer from a fixed location. So with an economic shock like Covid, the whole industry is incredibly vulnerable.
Cloning increases the risk
I am going to switch tack now and talk about bananas. This helps illustrate why business model diversity is so critical, so bear with me for a minute.
Most of the big long yellow bananas that we eat are cavendish bananas. They were developed about 150 years ago by gardeners in the UK trying to grow a banana for the Duke of Devonshire. The thing about these bananas is that they are all clones. That is every single one is identical genetically. A bug or a pest that finds a way to attack one plant can attack and kill every other plant.
That makes the Cavendish banana exceptionally vulnerable to disease shocks. In fact, the reason why the Cavendish banana is so popular today is that its predecessor the Gross Michel Banana, also a clone and grown in vast numbers, was wiped out by Panama Disease in the 1950s.
Identical and very similar business models in an industry make you vulnerable to external shocks and technological change. When this happens significant portions of the industry die
There are thousands of other banana varieties in the world, I’ve eaten wild ones deep in the Malaysian jungle that are so different that you’d barely call them bananas at all – and always covered with ants! None of these have the right properties that enable them to be handled shipped and priced so that they are economically viable to consumers.
Business model diversity is critical for resilience
What do we learn from this? Three rules.
Good business models spread far and wide.
Successful business models reduce diversity.
Diversity makes business models highly vulnerable.
Under good conditions, most business owners have very little incentive to diversify their business models. Why should they? the business model is there to help them maximise profits.
There’s also a powerful disincentive to switching to a new business model as times become uncertain. You reduce the resources available to a business as battens down to weather the storm. The perception is that you are reducing the businesses chance of survival.
And survival in times of high change
Think back to the bananas.
When Panama Disease infects a banana it starts at the roots. It then works up through the stem killing off all the leaves. They drape down the stem, black and brown. There is nothing the farmer can do to save the banana. If he digs out the banana and plants a new plant it will get infected as well and suffer the same fate.
This makes sense, doesn’t it? How many times do we see a restaurant open and close in a particular plot? Is it because it’s the wrong location or do they have the wrong business model?
The only way that the banana growers can grow bananas on land that is infected by Panama Disease is to grow different types of bananas. That means not growing a clone. It means something different. In times of change, when there is high uncertainty diversified business models makes more sense.
Business model diversity means that even if some business models are resilient to the economic or technological shock you have a much better chance of weathering it.
What we see today in the business world is that as business models start to seem vulnerable, that knowledge spreads across the world very quickly. The evolution of low-cost carrier business models since their genesis in South West Airlines has spread across the world and blighted traditional long haul operations.
One of the biggest reasons to do business model innovation is to increase this business model diversity. To innoculate businesses and industries from malign economic effects.
