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Entrepreneurs with Denis Oakley

I HELP BOLD LEADERS TRANSFORM THEIR BUSINESSES AND THE INDUSTRIES THEY COMPETE IN

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Don’t Copy Business Models

You have customers, value to offer them and a real problem that you are solving. That’s the core of your business model. A lot of entrepreneurs and business leaders get this far. It’s not rocket science. You can make some awful mistakes (not solving a problem). Once you know what the big mistakes are they are avoidable.

Don’t Copy Other People’s Business Models

What comes next isn’t rocket science either. It’s a simple insight that changes everything for a lot of those who hear it. Most startups and businesses at this point take the first business model that comes into their head and use it. This is a mistake. A bad one.

For example, if you are making a widget, your first thought may be, outsource to a factory in china and sell using Fulfilled by Amazon. Not a bad idea… but how many other people have done exactly the same? One reason why it came to mind so quickly.

Copying competitors business models can work in mature markets, but will generally lead to tough competition. Done unthinkingly it is a quick road to underperformance.
Copying competitors business models can work in mature markets, but will generally lead to tough competition. Done unthinkingly it is a quick road to underperformance.

Diversify or Differentiate Your Business Model

The insight that you need to get is this. If your business model is the same as everyone else you are at the mercy of the market. If the market grows fast, you will. If the market is brutal competition, you will suffer it. If the market tanks, you will sink with it.

Choosing a standard business model, not thinking about how you will get your value proposition to market will make everything so much harder. That wastes your time and your energy.

How do we make life easier for you?

Choose what your business model should look like

We pause at this stage and think about what the rest of the model should look like. You have choices. Lots of choices. Choosing to do something different here, makes you different and that can give you a huge competitive advantage.

When I work with clients I don’t let them go beyond this stage without doing a very simple exercise. I ask them for a list of their biggest competitors. Let’s say there are 3 of them.

Sketch Competitors Business Models

The first step is to draw out a business model canvas for each. Draw out that business model with what you can see on their website, off Glassdoor, google search ‘company name + business model’ and put it together.

If they are all the same, then doing the same thing is a bad idea a lot of the time. You need to do something different. If they are all very different your business model needs to be designed to exploit their weaknesses and break them.

Assume that they are all the same. The next step is to look at a number of big ideas about how you can pull your business model together.

Get a set of ideas

Let’s go back to the example that we have been working with, a consulting company that helps businesses that need to change their business models because they face too much competition, or their market is dying.

Once you have your value proposition in place and know your customs, pause, don't copy other business models, but start thinking about how you will choose your business model.
Once you have your value proposition in place and know your customs, pause, don’t copy other business models, but start thinking about how you will choose your business model.

What are some big ideas that we can play around with here?

Traditional consulting. I wine and dine clients to build relationships so I can get big contracts. I deliver these using bright young graduates (McKinsey/BCG model)

Thought leadership: I use the Philip Morgan colosseum model for independent consultants – develop amazing expertise and then create a number of products to upsell people who buy into the idea I am selling.

Silver bullet solutions – I target smaller customers with a high-pressure automated sales process. This is designed to upsell products, constantly maximising ticket prices.

Famous Author – I write a book and build a social media machine. This helps me become a new Gary V or Simon Sinek. I make money from speaking and high ticket consulting.

I’m going to leave it there. With another hour of thought, I’d have come up with another 10-20 ways of delivering the value that we identified in the previous post.

These are all business models that work and critically have lots of other people using them to deliver a similar value set.

Easy Approach: Niche

The simplest way of designing a business model is to niche. Choose a specific pain, solution and audience and use a standard business model. Are there enough people out there with the pain? Is the niche small enough that competitors won’t flock to it? Yes? Then that may be a good enough point for your business model innovation.

That’s what is taught in MBA courses. If someone else muscles in on you, your only defence is to be operationally better than they are.

If you want a better business model than that you have to put more thought in. That is what we are going to cover next time.

What next?

If you don’t want to come back to the blog every day click this link to get posts in your inbox – http://go.denis-oakley.com/newsletter .

Do explore these links to get more insights on how to build better business models

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Why perceptual shift is important in business model innovation

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?

Why perceptual shift is important in business model innovation
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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Business Model Innovation in Entrepreneurship

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.

Business model innovation in entrepreneurship: Part 1 - Use BMI to fight off the startup swarm and get a larger share of TAM
Business model innovation in entrepreneurship: Part 1 – Use BMI to fight off the startup swarm and get a larger share of TAM

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.

Business model innovation in entrepreneurship: Part 2 - Unlock value by using BMI to disrupt and kill incumbents
Business model innovation in entrepreneurship: Part 2 – Unlock value by using BMI to disrupt and kill incumbents

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.

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What is business model innovation?

Business model innovation is the process of changing or designing a business to significantly increase its ability to create and capture value and disrupt the markets that it competes in.

Companies that have identical or very similar business models to their competitors are highly vulnerable to market shocks and disruption. This is because they are all vulnerable in the same way, and often respond in similar ways. BMI gives companies the ability to diversify business models and find better paths to growth and increased profitability

Let’s break down this definition of business model innovation into its parts.

What is business model innovation?

business model innovation is changing your business model
BMI is a change process that transforms your business and the market it plays in

Business model innovation is a change process. In it, you change how the business or organisation works, usually substantially. This requires significant cultural and organisational change for existing companies. For new ventures, it often means that your business model is substantially different from existing ones.

BMI is an intentional process
BMI is an intentional process that takes you to where you want/need to be, and avoids false paths

Business model innovation is an intentional process where you are trying to find the best business model for a particular environment or context. It can be emergent. As you solve business challenges in a novel way or use new technology, you can develop entirely new business models.

business model innovation increases value creation substantially
BMI is value creation, significant amounts of new values for consumers and users

Business model innovation significantly increases the amount of value created. All business creates value, or should. With business model innovation the intention is to create a significant amount of new value. In many industries, the value of the new products or services is 50 to 100 times greater than the previous best solutions. Google, Facebook, Wikipedia all do this.

business model innovation ensures you capture the value you create
BMI is value capture, making sure that your shareholders capture some of the value that you create

Business model innovation significantly increases the amount of value captured. The amount of value that you capture drives the profitability of the business model. Successful business model innovation enables companies to generate significant amounts of profit. Uber significantly increase passenger and driver value but failed to capture value itself. WeWork and Wikipedia also fail to capture value well (though that was never Wikipedia’s intention)

business model innovation disrupts the markets you play in
BMI disrupts markets. If you don’t then value creation is harder and you capture less value…

Business model innovation disrupts the markets the business competes in. The scale of value creation created by the new business model is often a shock to the market that you compete in. The best business models make it difficult for competitors to respond, to compete or survive. This can be through product innovation, but more often it is through disruption of manufacturing or distribution processes.

What is not business model innovation?

BMI is not a small change to the business. In the normal course of business, small changes are constantly being made to a business, or groups of businesses as they engage in evolutionary competition. Small changes to operations that do not disrupt the market aren’t business model innovation.

Business model innovation is not incremental growth. A business model innovation process that increases revenues by 5% is a failure. There is no point in putting so much work and emotional labour into the project for such small returns. Business model innovation is creating a step-change in growth.

BMI is not being the same business at the end as when you started. Business model innovation transforms your business making it look quite different.

Business model innovation is not looking at a business model from another industry, superficially adopting it and then claiming that your business model is the ‘Airbnb of X’ or the ‘Uber of Y’

What else is important about BMI?

Business model innovation requires you to see the world differently. If you look at the competitive landscape in the same way as everyone else you won’t be able to find the insights that drive successful business model innovation.

Business model innovation is a creative process that draws on technical domain knowledge, a deep understanding of business strategy and the ability to find insights that competitors cannot.

BMI in Human Speech

Putting aside all the corporate strategy gumph. What you need to know is this.

If your business model is the same as everyone else and your industry or market is starting to be affected by change then you are really vulnerable. You need to change how you do what you do so that you are able to take advantage of all this change.

You can just use your intuition to make changes to your business. The trouble is most of your competitors have the same knowledge and nights as you, so you all make the same mistakes together.

If you want to make better choices and unlock the opportunities that come with change – and not just get screwed – then applying a BMI process is a good idea. It helps you to get from A to B (screwed up to fat cat) quickly and safely without too much stress. Unless you are really conservative, in which case get some valium because a great deal of what you believe to be true is going to have to change.

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Why Do You Need a Business Model?

Why do you need a business model? Every business has a business model. Just like every piece of ground can be mapped. It doesn’t matter if you’ve ever looked at the map.

I’ve worked with well over 1,000 entrepreneurs and business owners now. There’s one group of them who are super smart and focused. However, when I ask them a single question it all starts to unravel.

What does your business do?

The question is

What does your business do?

There are several variations on that question – “How do you make money?” is another favourite. When the entrepreneur is still talking after 5 minutes I begin to worry. When he (or she) is still talking after half an hour I know that they have no idea of their business model

Why do you need a business model? So you can simplify everything in your head and make your business mode effective
Why do you need a business model? So you can simplify everything in your head and make your business mode effective

You can sketch out the business model onto a piece of paper, you can condense it down into an elevator pitch. The business model is the essence of your business. It is how it works at a high level. Easy to explain, easy to understand. Easy to act on.

Why do you need to understand this? All business models aren’t equal.

When I first started out as an entrepreneur I almost started a kebab shop. I can’t remember why I didn’t now. My business model, there was the same as every other kebab shop. The crucial difference was that I didn’t have a young immigrant family to provide cheap or slave labour to run it.

I had no idea about that, and so it was fortuitous that I didn’t open the shop. My business model was going to be crap and I’d have underperformed compared to all the other kebab shops out there.

Why do you need a business model?

Most entrepreneurs and SME owners are like me then. They don’t look at the business model and so they end up being significantly less competitive than they should be.

If you don’t know your business model you are driving a second-hand car without an MOT.

If you don’t know your business model you can’t improve it

What do you need to do?

The first aid step is to quickly sketch out on a napkin what you do.

  • Who are your customers? Choose your best 3 types
  • How do you change their lives? What you are selling isn’t what they are buying?
  • What do they give you in exchange for changing their lives?
  • How do you reach them?
  • How do you make them feel when you are helping them?
  • What are you doing to create the change in their lives?
  • What do you need to make that change? A factor? A chip fryer? a big heart?
  • Do you need other people to help you? outsourced workers or factories, government licences
  • Where is your money going to go?

Nine simple questions. Most can be answered in a word or two. Don’t worry about making a full sentence.

That’s your basic business model. If it’s still fluffy or unclear spend some time on it. If there are big holes, spend time on the business model now! and if what you wrote is the same as all your competitors start thinking about how you can change it.

FAQ

Do I need a business model?

Yes. You have one even if you don’t know it. Knowing what it gives you another tool to become more competitive?

What’s my business model?

Use the 9 questions above to find the skeleton of your business model – then write the answers onto the business model canvas

Why do I need a business model?

Because having a good product or service and delivering it well is no longer enough. The business model is your business system. If that system works better than your competitors you will face far less competition

What happens if my business model is the same as everyone else?

Then you can only get the same results as anyone else. And if the industry gets hit by a technological, environmental or economic crisis then you will die alongside them. Just like the dinosaurs did

I’ve never done a business model before…

Don’t sweat it. You can’t get it wrong. Draw the first map of your business. Then keep thinking about it. After a while, you’ll realise that you could have done it better. So spend a few minutes making it better.

What’s the business model canvas?

It’s a sheet of A4 with some nice guidelines that help you write down your business model. There’s more stuff on the business model canvas here.

What happens when I draw out my business model?

Stuff that is complex and messy in your head becomes clearer. That makes it easier to create strategies, brief staff, sell to customers and raise money from investors

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Business Model Epicentres

When a superhero picks up a car and throws it they intuitively figure out where the car’s centre of mass is. This is important as it means the car doesn’t spin or tumble, and makes better TV. When we are creating business models it is useful to have something similar. Alexander Osterwalder calls it the epicentre.

The epicentre, in an earthquake, is the point on the earth’s surface that is vertically above the focus of the earthquake. It’s where it is all happening. In business model innovation it’s useful to think about business models having epicentres.

By this what we mean is what is the core of your business model? What is the type of business model that you are trying to create?

What are business model epicentres?

The first step is to ask where do you think you will find the biggest source of competitive advantage.

We can divide the business model canvas up into 4 areas.

  1. Customers – on the right side of the business model. This includes marketing, and customer relationships
  2. Creation – on the left side of the business model canvas. This includes key resources, key activities and key partners.
  3. Finance – at the bottom – where you make money and how you spend it.
  4. Value – in the centre – your key resources, activities, relationships and marketing as well as the value proposition.
  • Business Model Epicentres
  • Business Model Epicentres
  • Business Model Epicentres
  • Business Model Epicentres
The different generic epicentres where you can focus your thought when designing innovative business models

How do you use epicentres to compete?

The first question you have to answer is where shall we compete?

  • Do we focus on satisfying customers?
  • Do we focus on creating out product or service better, faster or cheaper?
  • Do we focus on innovative ways to generate revenue or save costs?
  • Do We focus on new ways of creating value?

You can answer this, as quickly as you have read the previous paragraph.

Alternatively, you can go back to your competitor analysis, and ask where existing competitors, substitutes, new entrants and out there competitors are finding the source of their strength.

Business Model Epicentres
Mapping out competitor business models helps to discover the source of their strength and their epicentres

In many mature businesses, most players will have adopted very similar epicentres. Most oil firms focus on the creation epicentre. Most clothing retailers focus on the customer epicentre.

Should you use the same business model picentres as everybody else?

Those may be the right choices. At this point when you still have a blank canvas in front of you, it’s great to ask?

Shall I follow the same path as everyone else?

When we are doing business model innovation we’re not trying to copy other people. We’re trying to develop business models that are disruptive and different.

What you should do is consider where most existing players have their current epicentre. Then choose a different one. This is a contrarian play. It’s choosing a different path, and by thinking about how you can take high-quality clothes and stack them high like a discount supermarket, unlike Gap or Zara, you end up with a profitable business model like Primark.

How do you find advantage by seeing things differently?

We keep coming back to this. How do you see things differently than the rest of the market? Where can you find your disruptive insight? So every time we have a choice of doing what they do or going our own way, we go our own way.

All we have done at this point is to choose a place on the business model canvas to start thinking about our future business model.

As you go forward through the design process it’s easy to move from one to the other. It’s easy to combine different epicentres.

What happens if we compete on the basis of finance and customers? How does that play out compared to creation and value? or against creation and customers vs value?

Working this way you can develop a much strong set of business models as a first draft for where you are going to take your business

Business Model Epicentre FAQ

Do I need to use epicentres?

Nope. it’s voluntary, but my experience is that 1. it adds more value to the discussion, 2. generates more valuable insights, 3. helps you create more robust business models

Which is the best epicentre?

That’s totally context-dependent. Different industries have very different preferences. In most industries, there is clearly a ‘right’ epicentre which often means that there are nuggets of gold hidden in other approaches.

Am I committed if I chose one epicentre?

No. The business model design process is iterative. If it doesn’t work or add value that’s ok. choose another one. Remember what we are doing is as much a search and discovery process as a building one.

Does it matter if the team disagree about epicentres?

Not really. It’s easy to fork your approach and see what new ideas are developed.

Where can I get more examples?

Alexander Osterwalder’s book Business Model Generation has a page full of examples.

What is a business model epicentre?

It’s an area of fundamental focus in your business model that helps to derive your strategy approach

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Business Model Epicentres