Product innovation is what everyone talks about. Products are visual and often physical. Products are used and the users can experience the benefits of using them. Business owners spend a lot of time and money developing products. This is natural. There is no more conspicuous indicator of success, and/or of self-worth, than to be told that your products are flying off the shelves. The most successful entrepreneurs spend even more time developing the components of their business model – which is a short hand expression for how the business translates investment in product development into revenue and cash flow. These entrepreneurs know that having the best product in the world means nothing if you cannot monetise it. The strength of the business model (including culture) is the source of sustainable competitive advantage. It is the thing that competitors want to copy but do not know how to copy.
So when people talk about business models or ‘innovating the business model’ to create competitive advantage what do they mean? What are the components of the business model and What mental models can be used to help develop them?
Doblin, the innovation practice of Deloitte Consulting LLP, systematised business model development into 10 components to create a mental map for business owners to think through how to develop their business model and select the components of their business model that really make a difference to value creation. This map can also be used to understand and evaluate the business models of competitors.
The components are illustrated below
1. The business model includes what Doblin calls “Configuration”, namely the pricing and profit model, supply chain, business structure and assets, product development and manufacturing processes
2. The product itself and associated services or the “Öffering”, and
3. The front of house customer “Ëxperience”, namely how users experience your business and the products it sells at every point of interaction they have with you
Key action points:
There are 3 principles to follow to innovate your business model:
1. Analyse the business models of your competitors – where are they strong or weak and what thy do and how they do it
2. Analyse what your customers really want by observing how they buy and use your products and competitor products and their pain points across this continuum – identify the gaps in product offers and the gaps between what users want and what competitors offer them
3. De-emphasise dependence on products and technology – these are the easiest capabilities for competitors to copy. Based on your research focus on the other components of the business model that are important to your customer and add value to your business that competitors are not doing well or are not doing at all.
4. Adopt a mindset of continuous innovation to improve business performance across these components and to work out which (if any) other components can add incremental value to the customer and your business. Maintain a philosophy of re-invention: a business that doe not have this mindset is treading water..
Innovating across product only (the “Offer”) as simple innovation that can be copied easily with sufficient time or money. According to Doblin, intelligently integrating across 5 or more components is often enough to differentiate your business in the market and outperform the competition. Of course, this is often easier said than done which makes it so hard to copy if you can get it right. The value is in the business model noty just the product.