competitive advantage Archives - Entrepreneurs with Denis Oakley

Entrepreneurs with Denis Oakley

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

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competitive advantage

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Why is business model innovation important for competitive advantage?

If you have the same business model as everybody else it is very difficult to find sources of sustainable competitive advantage. In this post, I’ll explain why business model innovation is important for competitive advantage and what you can do about it.

Every business has its business model. In mature industries, these business models tend to be the same. This means that the business is working the same way as all the other businesses.

Why traditional business models get stuck in competition

For example, compare electricity-generating companies. They buy coal or oil from the same mining companies. Then they burn it in power stations made by the same group of civil engineering companies, using boilers and steam turbines designed and built to the same design, using similar control software and then pushing the electricity out onto the grid.

Their ability to generate better returns than anybody else is limited to how well they manage their staff and maximise their productivity, and how they finance, maintain and replace their assets.

All other things being equal outperformance in staff, IP, financial resources or assets will tend to revert to the mean over time.

Here’s another example. Car manufacturers have business models that design cars to very similar aerodynamic performance and regulatory standards. These are then built as a platform using components and supply chains that are shared across the car industry. Sources of competitive advantage, for example, IP like the Toyota Production system give an advantage for a while. As the knowledge spreads the manufacturers tend to revert to a challenging competitive environment.

It’s like playing football again and again with the same few teams. You win some, you lose some, but there’s nothing that you can do so that you will win the next 10 or 100 games in a row.

The promise of business model innovation

That’s the promise of business model innovation. It’s a way of breaking the deadlock, the stalemate. Instead of playing games where you are happy to grind out a draw, or being focused on getting 1 point ahead in the league tables, you start thinking. How do I change the game?

Let’s stick with the football game analogy.

If I wanted to win lots of games what can I do?

In normal operations, I can get more cash, hire better players, hire a better coach, and perhaps find better ways to train my players. In normal business terms, these are all standard operational plays. They are the ones that everyone learns at business school. A million MBA’s using the same tools on similar problems means that you get similar strategies and results. So no matter how clever the strategies or the operational plays are – you end up in the same grind. You play for draws and hoping to grab a point here or there.

Why business model innovation enables competitive advantage

Business model innovation changes the rules of the game.

It asks, are we here to play football or are we here to win games. Are we here to make cars or delight customers and make money?

There is a presumption that the old way of doing things is so mired in competitive difficulties that you have to take a different path.

Using the football analogy we have to think about the game in different ways.

why is buiness model innovation important for competitive advantage
Business model innovation moves us away from the familiar business models that we are co portable with, looking for new ways of playing that may seem weird to strange. In all cases they should enable you to create and capture more value AND disrupt the competition

What happens if we change the pitch shape – have a circular field?

What happens if we change the inclination – make it tilted, or humpy, or add bunkers in like they do in golf?

if we change the numbers of the team, the rules, the number of teams or the length of the game what will the impact be?

Industry insiders will argue that whatever you are doing,

it is not football

Business model innovation answers –

So what. We are here to win, we are not here to play football.

Why is business model innovation important for competitive advantage?

Business model innovation is important for competitive advantage because it changes the rules of the game. When you are playing a different game, dancing to a different tune, then it is difficult for competitors to respond. You are acting weirdly according to the normal competitive rules, and so most tactics don’t work nearly as well.

It’s harder for them to predict what you are doing, and why, and then come up with effective counters.

Because you have decided to see the world differently, resources and assets are valued differently. This means that you can find additional resources cheaply because others don’t value them the same way as you do, and sell existing assets off, prize assets even because they don’t offer you the value that they once did.

Above all business model innovation gives you a competitive advantage because it lets you out into an open space where, for a time, you are the only player. This gives you a chance to grow rapidly and establish a market share that gives you economies of scale and scope that restrict future competitive attempts by other players.

Why is business model innovation important for competitive advantage?

It gets you out of stagnant competition into a growth landscape

Why are companies stuck in competition?

Their business models are similar or identical making any source of competitive advantage transitory

What do companies need to do to get a sustainable competitive advantage?

They need to change their business models through a process of business model innovation. This may mean a big change in the business model or incubating new ones.

What is a sustainable competitive advantage?

It’s the ability of the company to be generating and capturing more value than its peers for a sustained length of time.

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How You Can Use Business Models to Become More Competitive

Become more competitive using the business model canvas The business model canvas is a great tool for helping you to develop your competitive advantage. I’ve used it for several companies to help them become more competitive. The secret, and I’ll say this right up front, is to sketch your business out in the business model canvas and then think imaginatively how you can change it. As you see how you business can work differently you see lots of paths to becoming more competitive. Of course if you don’t do anything you’ll stay exactly where you are. I’ll take you through the steps to becoming more competitive one at a time.

Draft Your Business Model Canvas

I’ve drawn out hundreds of business model canvases. A first draft will normally take a few minutes. The process is described in detail in my free business model canvas course. For what we are trying to do here the aim is not detail. You are not trying to get the canvas accurate to the nth degree.

What you are trying to do is to see the business in it’s broad outline. For most companies that means 1 – 3 components in each of the 9 parts of the business model canvas (customers, value proposition, relationships, channels, activities, resources, partnerships,costs and revenue). Go with your gut about what is important and don’t over think it at this stage.

Play What If

The next step is a game of what if. For each of the 9 business model canvas segments ask yourself “What if this was different?”

  • What if I had different customers? Who would they be?
  • If I offered a different value proposition to my customers what do they need? What would they buy? Would it solve the same pain?
  • Can I reduce the cost of my customer relationships? What would the impact of that be? If I doubled my spending on supporting my customers how would that change my business?
  • If my three biggest channels stopped working (random act of God, legal change or whatever takes your fancy) how would I get new customers? Could I grow my business only through referrals? How would I do that?
  • What do I need to do to double the average sale price?
  • Are there any key resources can I do without? What additional key resource could I add that would transform the value that I provide to customers?
  • Are my key activities all really necessary? Which activities can be outsourced? How would my business change if I really improved the people delivering several key activities so that they were the best in the world?
  • What happens if my industry changes and one or more key partners stop existing? Who would I really love as a partner? What do I do now that a partner could do better?
  • How could I reduce my costs by 30%? If I increased my costs by 50% how much additional value could I provide and would customers pay for it?

Asking these questions lets you see different versions of reality. Many will lead to failure. You don’t care about those. What you are looking for is the right question and answer that sets you on the path to become more competitive

Make or Buy?

When we start out in business we make lots of make or buy decisions. Do we custom code the whole website or do we use WordPress with an off the shelf theme?

A make decision is when we create a key resource through our own actions. A buy decision is when we rent or buy the key resource from someone else.

In the space industry Nasa buys in its space rockets and shuttles from third parties (or used to when it did spaceflight). Space X by contrast has decided to build, own and operate its own spacecraft.

In the early 2000’s many companies decided to rent their call centres from companies operating in India and the Philippines. That was a buy decision. Now many have moved back to building their own competency and skills in running them themselves.

Every company has it’s own approach on how to become more competitive. There is no perfect make and buy blend. What works is what delivers comparative advantage.

You may have a philosophical position here that outsourcing is always wrong (Uber outsources taxis and driving to its drivers to reduce the amount of capital it requires). That is not the point with this exercise. The point is to imagine it and to see what you could do differently. Seeing new possibilities is the first step to becoming more competitive.

Competitive Comparison

The final approach is to get a list of your top five competitors. I’m sure you know how they work already but take a few minutes and go over their website, their sales collateral and and news reports about them. Then draw a business model canvas for each of them. Whilst you do it don’t think too much about your business – though I’m sure lots of things will start popping into your head as you do it.

Then lay out all six business model canvases side by side (yours included) and start looking for opportunities were you can break their business model. Do they rely on cheap resources? What does that mean for the rest of the business? Are they able to deliver as good a value proposition? Is their customer support of lower quality? Do they pay more to acquire customers as a result? Knowing this what can you do to disrupt this?

Competitors when you look at them like this cease to be monolithic and decompose into sets of linkages that you can attack and disrupt. One of of the weaknesses of Google’s business model is that it depends on free information from every website (including this one) giving it the raw data that it uses to return search results.

Become More Competitive

Step back now and look at what you have learnt.

You will have learnt that:

  • There are lots of things that you could do differently
  • You made choices early on about your cost base that you have never really revisited
  • Your competitors have many weaknesses in their business models that you can exploit.

Now draw one of more new business model canvases that synthesise all this information and you’ll start to see new strategic approaches. It’s unlikely that you’ll be able to change overnight. Out of all this it will be a lot clearer how to chart the way forward. That becomes the basis for your new business strategy. You will be able to become more competitive as a result.

Will it work immediately?

Of course not! Everything else has remained the same. All that has changed is the way that you see the world. You now need to go out and test what you have discovered and see how it holds up in meetings with your key staff. You need to test it on customers and suppliers. Then you need to make the changes to actually implement it and deliver value. If you want to become more competitive the first step is reframing the world. Then you repurpose your business.

This also works for startups and larger businesses when they have to pivot.

 

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How to Find a Competitive Advantage as A Startup

Creating Unlevel PLaying fields
As a strategist and entrepreneur, this is what you are trying to create

I read a really interesting Jill Konrath article this morning that made me think about what we are really trying to do in startups, in marketing and sales. That is how to find a competitive advantage.

Her key point was

our job, as sellers, is to make things unequal.

In much of the modern world, we are focused on promoting equality and fairness. Earlier this week a Nobel Laureate resigned after he complained about female scientists, and in vast areas of our personal and social lives, we expect people to be treated fairly and equally regardless of their sex, colour, race or almost anything else.

That’s not the way it should be in business. Ideally, you want to create an environment where it is difficult for the competition to flourish, where customers automatically think of you and competitors have to pay an additional cost to get or stay in the game.

A lot of traditional marketing has focused on this through brand building but I think it is more than that. Take for example Uber.

Uber has pots of money in the bank, lots of actual and potential competitors and a ferociously combative approach to regulators and legal systems. My view is that they see drivers of their cars as an intermediate step that will last for a few more years until cars become self-driving.

If that’s right then by actively poisoning the well in lots of cities around the world they are creating a huge barrier to entry for other companies to scale. Once they have self-driving cars they can give up all the legal battles freely and comply – because their cost of operations will be a fraction of traditional taxi companies.

Creating Competitive Advantage

So this comes back to Porter’s Five Forces and the question that must be at the forefront of every entrepreneur’s mind –

“How do I find a competitive advantage?”

  • Yes, you can make a business model.
  • You can get customers.
  • Yes, you can get traction.

But how do you have a market share significantly large than any competitor? How do you ensure that you have a conversion rate or margin that is significantly higher? How do you find a competitive advantage as a startup and keep it?

It’s really hard to do which is why it’s so much fun to watch Uber’s billion-dollar decade long bet play out. It may or may not work, but if it does it will have a similar position to Standard Oil, Ford or Microsoft in their glory days – at least for a while.

How To Find Competitive Advantage?

The killer question is how do we do this for a startup?

Most of the time you don’t and you can’t. There are too many me-too, copycat products that aren’t original or disruptive. Where you can it is mainly a focus of playing and playing with the business model. Some entrepreneurs I know find a business model that works and then using the business model canvas and other tools they iterate. They mentally look at hundreds of variations.

What happens if none of these segments is viable? Can we use an entirely different channel? Can we use a monetisation strategy from another industry that will work in ours but which competitors can’t adopt for fear of cannibalizing existing revenue?

Iteration, scenario building is one way of doing it. We could call it the ‘scientific’ approach.

How to find competitive advantage
How can you find a black swan to boost your business into orbit?

Beer, Drugs and Zen States aka Black Swan Hunting

The other approach to finding a competitive advantage is the ‘mystical’ one. I get many of my best insights swimming laps, whilst dreaming, doing cross country runs or singing in the showers. Doing business modelling drunk or stoned can really open up possibilities. The ancient Babylonians tested decisions drunk and sober to see that they worked.

Of course, you get a lot of rubbish non-viable ideas – but you get similar failure rates doing it scientifically. The difference is that when you take a scientific approach you have a set of tolerances or parameters that bound potentially good options and limit the possibilities of black swans

When you take a mystical approach your inhibitions are relaxed and you go down paths that rationally seem to have a low payoff. Most have no payoff, but you only need one to work to give you an unfair advantage. Then you are heading out looking for black swans

In reality, you do both, but you need to be constantly asking the question:

“Where can I find an advantage? How can I use it to make the world unequal?”

This needs to be a core part of your lifestyle for years.

No Paralysis

What you have now though is good enough. As Steve Blank says :

you need to get out the building.

Get the business working, make sales, grow. You can do all that without having a great competitive advantage. The real massive and long term growth that comes from dominating a sector, rather than riding an economic upswell, comes back to having this question haunt you. If it doesn’t you are relying on luck and she is a fickle friend.

If you are still looking for your competitive advantage contact me for a free consultation

How to Find a Competitive Advantage as A Startup