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The Formula For Business Model Innovation

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The Formula For Business Model Innovation

A business model consists of four things. First, it’s a description of how you make money, as it tells why and how your customers pay for your products and services. But even more important, a business model provides an experience, and that experience is essential to what people pay for. The difference between Saks Fifth Avenue and Walmart isn’t just the quality of the merchandise and the prices, it’s the way a customer feels because of the service they get, the atmosphere, the vibe.

Similarly, the genius of Starbucks’ business model innovation was figuring out how to create a cup of coffee that people would pay ten times more for, and delivering it in a welcoming atmosphere where people are contented to hang out or work for hours, but doing this at a really low cost to Starbucks.

The genius of Apple’s business model is also the experience, the experience of using their devices, and the care and attention that’s given to product design and user interface design.

In fact, every company provides or enables or delivers an experience of some sort, and the essence of business model innovation is designing those experiences thoughtfully, and improving on what already exists.

This is pretty easy to see in a retail store environment, but it’s just as true online.

Google’s simple search page also offers a distinctive experience, and in fact its vast white space has been meticulously designed to convey a very particular message: this page tells you that “it’s all about you, and whatever you type in the search field.”

This has obviously been wildly successful, as Google reports that it did more than 3 trillion web searches in 2017, which works out to roughly 95,000 per second. Clearly people like using their (sort of free) service.

But what makes it possible for any business model to operate? The third element of the business model is whatever goes on inside of the organization that enables it to create, provide, and  deliver those experiences.

The fourth and absolutely essential element of your business model is that it defines how you differentiate (or fail to differentiate) your company.

To summarize, then, the four things that a business model does simultaneously are these:

  1. It’s how you make money.
  2. It’s how you deliver experiences to your customer.
  3. It’s how you use products, services, technology, supply chain, and operations to compete.
  4. It’s how you differentiate your company.

Every company has a business model, because it’s just a description of “what is.” The opportunity in business model innovation is in thinking about “what should be.”

The Formula For Business Model Innovation

The failure of a business almost always reflects at root the failure to innovate, failure to recognize change, and the inability to respond to change adequately or appropriately.

And today as we see that yet another massive wave of new technology is about to crash across the global marketplace, what with artificial intelligence, blockchains, machine learning, self-driving cars, robots, quantum computing, etc., all arriving immanently, we must therefore anticipate that every existing business model of every existing business is thoroughly and utterly subject to disruption. This is a stark warning about the need to innovate.

Wouldn’t it be so incredibly helpful if there were a formula to explain all this, to simplify it and make it useful in practice? And indeed there is, a simple, three element framework:

1. Outside: The company provides experiences to customers through the delivery of products and services. The current quality of those experiences is today’s reality; making them transformatively better is the vision.

2. Inside: The factors inside the organization make this delivery possible. These can be many and varied, including the product or service itself, the supply chain, the operations, and technology. These are the means.

3. The Bridge: And then the way that a company communicates this value proposition to customers through marketing and branding, which are the messages and means through which the company communicates. This is the story.

This formula for business model innovation immediately gives us essential questions to ask about our own business model, and how to improve it:

  • What’s the best possible experience that our customer can have? (vision)
  • How can we organize ourselves to deliver that? (means)
  • What’s the best brand identity to represent it? (story)

We also observe that the most successful business model innovators tend to focus obsessively on one particular aspect of their business means, and develop it innovatively and far beyond what’s been done before. That is, they push it to the edge, the absolute limit of possibility, and in so doing create an entirely new capability that they then leverage to define or enable an exceptionally better value proposition for their customers.

Let’s look again at some of the companies we’ve already been discussing to see how this applies: where did they push it?

Amazon: The company’s determination to leverage its core technology into every aspect of the customer relationship.
Apple: Obsession with the user interface design created an ease of use that is the basis for nearly everything else that Apple has accomplished.
Google: Obsession with creating user traffic on its platforms has driven two decades of growth.
Southwest Airlines: Obsession with reducing operating costs enabled an entirely new business model and created three decades of exceptional growth and success.
Walmart: Obsession with supply chain optimization is the foundation of its global retailing empire.

The word “obsession” shows up in each one for good reason, and in fact in each of these examples it’s a dual obsession. On the inside, it’s the obsession to optimize some aspect of operations; on the outside it’s the obsession to optimize the customer’s experience.

How Business Model Innovators Think

Getting there may not be easy, though. Southwest Airlines had to endure a near-death experience during its startup stage before a core element of its eventually-successful business model became clear; it took Google years to figure out how to make money; Amazon and Uber are still losing money, and Apple was moribund as late as 1997, and it was only in about 2005 that its many decades of persistence began to pay off.

How does this work in practice? Business model innovators often begin with these questions simultaneously at the forefront of their thoughts:

The first is simply, What would make the customer’s experience better? Answering this question well requires a detailed understanding of the tacit dimensions of the user experience.
The second is, How can we achieve that? This is the means.
The third question then focuses the compelling story, the critical importance of branding.

These core ideas and others can be found in my latest book The Brand Bridge – How to Build a Profound Connection Between Your Company, Your Brand, and Your Customers.

At The Blake Project we are helping clients from around the world, in all stages of development, redefine and articulate what makes them competitive at critical moments of change. Please email us for more.

Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth and Brand Education

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