Business model innovation in entrepreneurship is designed to kill other startups and help you unlock value from incumbents
Do you need business model innovation as an entrepreneur? Do you need to come up with a shiny new business model? Is all the extra effort required to think about business models even worth it? I’m biased, but even with that bias, the answer is still yes. If entrepreneurs don’t do business model innovation they are probably doomed.
There are two reasons why entrepreneurs need to spend a lot of time on business model innovation. One is defensive. one is offensive
Cull the herd
First the defensive one.
Entrepreneurs swarm to an opportunity like flies to a rotting corpse. You never just see one fly on a dead animal. Entrepreneurs who only see their business and no other competition are normally delusional. They can’t see the other flies or the corpse isn’t there to start with. That’s a rule of thumb, if it doesn’t seem true to you get an advisor to ask you tough questions and listen to hir’s advice.
Don’t rely on luck
In almost every opportunity there will be a lot of new entrants going after the same opportunity as you. With similar resources, skills and market access there are normally two differentiators. Luck and business model.
Luck is by far the most important thing for entrepreneurs. It probably accounts for as much as 90% of individual success. Did you meet the right VC at the right time? Did you enter the market at the goldilocks point? Did the right technical tools exist? Had someone else done much of the hard work of educating the market?
What you can control though is the business model. Whilst most startups focus obsessively on the product (and somewhat fewer on the customer) few think that much about business models. From 10,000 feet this means most startups are pretty identical in a market. A horde of lemmings.
In the market shakeout
Markets shake out and of a thousand startups chasing an opportunity, 5-10 will have substantial market share after a decade or so. the rest will be dead, eaten, rotten, or desiccated corpses by the roadside.
In 1900 there were about 1300 manufacturers of cars in the US alone. two decades later there were only three of any note – Ford, GM and Chrysler.
You need a business model that helps you win
So for a startup to survive that long they need a business model that helps them fend off and eat the other startups. It’s that simple. If you don’t have any competitive advantage over them, then you are relying on luck and the odds don’t favour you.
You need to design your, business model, to be cutting down and thinning out the horde of competitors. Yes, you need to grow bigger and fatter. At the same time, you need to be killing them off quickly. That’s the job of your business model to enable that.
Take down incumbents
The offensive play is equally aggressive.
Entrepreneurial swarms happen in two closely related areas of the business cycle. When a new technology opens up a new market – for example, blockchain, crypto, self-driving cars, or even automobiles to use an example from earlier.
Incumbents own value that belongs to you
A second swarming happens when an existing successful business model starts to fail. Good examples from the last few years are publishing, music, banking, law. The incumbents are deeply entrenched and have a great deal of cash and resources. They are also troubled. They can’t give up on the existing franchise which still generates lots of cash, but they see the problems facing them.
There is a huge amount of market share here to be taken.
Product design only gets you so far
Now you can design an awesome product or service and go head to head and slowly win market share. You might even get bought in a lucrative private sale that sets you up for life. To make real money you have designed your business model to exploit the weaknesses of the incumbents.
Going back to the nature analogy a bunny rabbit isn’t going to take down a mammoth. A sabre tooth tiger with long fangs will.
Use business models to change the game
A good example here is how Apple systematically designed features into its business model(s) that enabled it to take down the camera film industry, the digital camera industry and the music industry in the 2007-2013 period. That’s 4-5 fortune 100 companies that it gutted and captured the value from.
Competing at a product level works in favour of incumbents. Competing at a business model level works in favour of the disruptors. Salesforce in the period 2000-2015 competed at a business model level against the big software providers – Oracle and SAP with its no software – SaaS model. By 2015 or so the incumbents had caught up and Salesforce was forced to then compete on the product level going into a very different competitive environment.
