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.
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.
It gets you out of stagnant competition into a growth landscape
Their business models are similar or identical making any source of competitive advantage transitory
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.
It’s the ability of the company to be generating and capturing more value than its peers for a sustained length of time.
