The new economy, characterized by globalization, changed the relation of businesses and customers. Whereas in the past businesses were supply-centric, they now need to be customer-centric. This implies re-evaluating value propositions of businesses towards customers. This article elaborates on the central question how businesses capture value from providing products and services. To advance the discussion it relates to sustaining competitive advantage and business model innovation.
What is a business model?
A business model demonstrates how businesses create and deliver value to customers. It describes the design of value creation, capture mechanisms and delivery. Two questions underlying the framework are: “what are ‘deep truths’ about the fundamental needs of customers?” and “how do you (configure your business to) deliver this value?” Business models can either explicitly or implicitly employed. The Business Model Canvas is one such model that includes: a profit formula, key resources, key processes and, central to the model, a value proposition. A good business model yields compelling value propositions to customers and enables capturing value by delivering products and services.
“what are ‘deep truths’ about the fundamental needs of customers?” and “how do you deliver this value?”
How does a business model relate to business strategy and competitive advantage?
Nonetheless, business models are relatively generic models that can readily be imitated. Therefore Business strategy complements the model by designing and protecting competitive advantage in imperfect markets. This means business strategy figures out isolating mechanisms that prevent business models from being imitated by competitors. The VRIN (Valuableness, Rareness, Inimitability and Non-Substitutability) framework offers a tool to examine the (potential) competitive advantage of businesses. When employing a differentiating strategy, businesses can secure higher returns and sustain their competitive advantage.
Four strategic analysis steps are proposed to achieve sustainable business models:
- Segment the market
- Create a value proposition based on customer needs for each pursued segment
- Design and implement mechanisms to capture value from segments
- Figure out and implement isolating mechanisms to hinder imitation by competitors
Three factors appear relevant to impede competitors from imitation: (1) Hard to replicate systems, processes and assets, (2) Uncertain imitability, referring to making it difficult to outsiders to understand how the business model is implemented and (3) cannibalization of existing sales and profits or upsetting business relationships.
Why and how to innovate business models?
Innovations like refining existing products, creating new products, lowering costs and delivering increased customer value go hand in hand with business model innovation. The more radical the innovation, the more likely it is that business models have to be revised. In order to profit from these inventions and innovations, businesses need to employ resourcefulness and creativity. Business model innovation defines how to capture value and pursue markets. The mode of integration of the innovation in the business depends on the value chain of a business. There are three approaches to capture value from innovations:
- Integrated business model: businesses are responsible for the entire value chain from manufacturing to distribution.
- Hybrid business model: mixing own value capturing activities while simultaneously enabling licensing.
- Outsourced business model: licensing businesses to commercialize upon the innovations.
What is the role of discovery, learning and adaptation in business model innovation?
The process of innovating a business model requires creativity and insight. Insight as in information about customers, suppliers and competitors. Creativity in defining viable ways of capturing value from the deep truths of customers with available sources while protecting the model from imitation. This primarily is a process of learning and adapting based on experimentation. A significant component selecting the right architecture is tacit, needs adjustment and positioning. One way to do so is by testing the model against the current business ecosystem and how it might evolve. Questions that can be asked about the provisional model include:
- How will the product be used and what customer’s problem does it solve?
- What might customers be willing to pay for the delivered value?
- How large is the target segment?
- What competitive offers exist?
- Where is the industry in the evolution stage (is there a dominant design)?
- How should the product solution be positioned and presented?
- What are the costs of delivering value and how volume sensitive is it?
What’s my takeaway?
This article elaborated on a business model, the relation to business strategy and innovation. It concluded by describing the role of discovery, learning and adaptation in the phase of innovating. A business model primarily is a conceptual model that describes what customers value, how your business captures this value and how it actually delivers this value. Business strategy is there to prevent competitors from copying your models. Finally, innovating requires learning and adaptation of the business model to actually capture value. This can be done by testing it against the current or possible future of the industry.
Teece, D. J. (2010). Business models, business strategy and innovation. Long range planning, 43(2), 172-194.