BUSINESS MODEL DISRUPTION
A business guide to disruptive business model innovation
14 ways for startups and businesses to change their value propositions and operating models to disrupt traditional business models
Reinventing a business model means reinventing its value proposition and operating model, and as a consequence, generating a new profit equation (i.e. revenue generation and cost structures). When attempting to disrupt a business model, startups can aim for 14 ways or ideas that could change current business models’ value propositions and operating models.
Ways to disrupt the ‘value proposition’
- Reducing customers’ costs of transaction
- Improving the customer experience by offering an enhanced solution
- Converting the conscious non-customers
- Delivering more value — functional or emotional
- Benchmarking other segments of the market or other industries
- Modifying the revenue stream
Ways to disrupt the ‘operating model’
- Utilizing technology
- Modifying or changing steps in the value chain
- Eliminating or adding steps to the value chain
- Leveraging strategic resources and key competencies
- Teaming up with competitors
- Identifying and teaming up with complementors
- Expanding the resource base of the firm
Business model innovation is a specific form of innovation that is radical in nature. As we are in the midst of The Fourth Industrial Revolution and since every industrial revolution has been disruptive in nature and outcome, with a good degree of optimism, it can be stated there are several disruptions yet to come, and there are plenty of new business model disruptions to be witnessed. Wanna be disrupters — entrepreneurs or corporations — need to fully grasp business model innovation if they are to succeed in changing and winning over markets.
Defining innovation
While in the public mindset innovation is often associated with technology companies and technological trends, in practice, it is much broader than just that. Innovation can take the nature of product, process, managerial, or business model form and its impact could span across a continuum of incremental or radical change. Therefore innovation is a polysemic word and we need to define the scope of conversation when talking about innovation.
- Business model innovation is the art of enhancing advantage and value creation by making simultaneous — and mutually supportive — changes both to an organization’s value proposition to customers and its underlying operating models.
- Management innovation is anything that substantially alters how the work of management is carried out or significantly modifies customary organizational forms, and, by so doing, advances organizational goals. Put simply, management innovation changes the way managers do what they do, and does so in a way that enhances organizational performance.
- Process innovation is the implementation of a new or significantly improved production or delivery method. This could include significant changes in techniques, equipment, and/or software. Process innovation can be intended to decrease unit costs of production or delivery, to increase quality, or to produce or deliver new or significantly improved products and/or services.
- Product innovation is the introduction of a good or service that is new or significantly improved concerning its characteristics or intended uses. This includes significant improvements in technical specifications, components, and materials, incorporated software, user-friendliness, or other functional characteristics.
Take a look at the following rankings provided by BCG and Fast Company at some inspirational and innovative companies around the world along with their stories and recent trends.
Defining the ‘Business Model’
The business model is a description of how a company generates a profit. It revolves around three pillars: the value proposition, the operating model, and the profitability equation.
- The value proposition describes the ‘offering’ — or the ‘what’, or the ‘supply-side’ — proposed to the customers or stakeholders — or the ‘who’, or the ‘demand side’ — in a very broad sense. When the offering meets the customers’ demand, we tend to say that product/service/offering-market fit is established.
- The operating model is related to the “how” or the manner in which the company creates and delivers the value proposition to the client. It describes the companies’ value chain, tangible and intangible assets, and the key competencies and know-how employed to deliver the value proposition to the client.
- The profitability equation is the financial representation of the first two pillars, stemming from the previous components in which the value proposition generates the revenues and the operating model depicts how the firm is organized, or the cost structure, entailing variable costs, and fixed assets, and the working capital requirements, entailing accounts receivables, payables, and inventory. For a business to be profitable, the revenues from the value proposition need to be larger than the costs associated with constructing the operating model of the company.
The business model also serves as a useful unit of competitive, corporate, and strategic analysis:
- Competitive analysis. Within a given industry, there can indeed be several types of successful and profitable business models such as in the airline industry where low-cost airlines such as EasyJet exit alongside the more conventional airlines such as Emirates or Lufthansa.
- Corporate portfolio analysis. A company can have one or several business models, for example, Samsung develops smartphones, TVs, and ships, and is active in the construction and oil and gas industries. Each of these business units will have its value propositions, operating models, and profitability equations. Such a portfolio of companies and their respective business models can find synergies across their business units via reduced costs or increased revenues.
- Strategy analysis. A business model helps break a business unit’s internal operations and strengths into refined units of importance, and combined with external positioning tools such as the PESTEL framework or Porter’s 5 Forces, one can improve current business models or build new ones that could eventually improve profits.
Understanding the value proposition
The ‘who’: fully assesses the stakeholders of the value proposition
A value proposition can be complex, offering different values to different stakeholders. When defining the ‘who’ part of the value proposition, always assess implications and offerings for all stakeholders of the business model. For example, in the case of Uber, value is created or destroyed, for a range of stakeholders including riders, drivers (e.g., unemployed students), traditional taxi drivers, city officials, lobbyists, etc. Only a whole and complete assessment of the values offered or destroyed for the entire array of stakeholders can help deliver a holistic assessment of the impact of the business model.
The ‘what’: define your competitive positioning
The offering needs to be strategic, meaning doing something different from the competitors. The graph below showcases four different possibilities that an offering can position itself in the market. Note that the lines drawn here are not so straight in reality.
- The non-viable business zone. This is a large zone in which we will find no viable value proposition because the price is not attractive enough to the perceived value of the offering.
- The average offer of reference. If the market is mature enough and there have been enough players on the market that have copied each other over time, we will find an average value proposition at an average price called the average offer of reference. However, if the market is nascent, the reference offer corresponds to what offers customers will refer to as a comparison to the new offer. For example, when microwave ovens appeared, customers would compare them to an average oven and an average stove.
- High-end differentiation. More perceived value can come from more functionalities, more convenience, or more emotion in what is offered. Therefore, these value propositions will be proposed at a higher price and generate, if the cost base is under control, a better ROI.
- Low-end differentiation. This positioning offers less perceived value at a lower price and could generate — if the cost base has also been reduced enough — an interesting return on sales. This strategy requires lowering the cost base of the company significantly to be successful.
- Cost leadership. Here, the value proposition remains untouched, but the company can lower its cost base, developing a cost leadership due to factors such as economies of scale, cheaper access to inputs, better processes, improved technologies, or better management.
- The game-changer. This is a value proposition that can achieve a higher perceived value at a lower price due to lowered operating costs.
The game-changer
Here the value proposition looks very appealing since it offers a lower price at a higher perceived value. This value proposition tends to be so appealing to the customer that the conventional rules of the game in the industry are usually disrupted.
The examples here are Facebook and Google which provide freemium services to users, perceiving the value proposition as high at no cost while Facebook and Google monetize their services via ads sold to large corporations — a game-changing business model. This is a textbook example of the decoupling of the ‘using’ and the ‘paying’ customer.
Zipcar and other peer-to-peer ride-sharing companies have been game-changers for the automotive industry, at least for a large segment of the market. Note Zipcar’s tagline, wheels when you want them — with Zipcar you don’t own a car anymore, you want wheels that take you where you want, when you need them. Overall, the cost of driving the car is much lower, since you pay by the hour and the perceived value is better since you don’t have to bother about parking the car or maintaining it.
Tesla is also another game-changer, offering high-quality, software, and technologically equipped, environmentally-friendly electric cars at a cheaper price, compared to other manufacturers who want to deliver the same offering. And as Tesla scales output, its costs and price will decline further enhancing its game-changing positioning.
The same line of reasoning applies to Uber and Airbnb in comparison to their traditional modes of transportation and accommodation.
What usually happens when a game-changing business model is introduced is that this new business model becomes the average offer of reference in the market that it has disrupted, and market dynamics start to shift according to the new trends and business norms. Hence, coined as a ‘game-changing business model’.
Detailing the value proposition using the strategy canvas
A strategy canvas or value curve is a line graph that plots the value attributes of a business and their level of offer against other competitors or industry benchmarks. The strategy canvas helps formulate a competitive strategy. Below is the value curve for Cirque du Soleil compared against its relevant market competitors.
As seen from the value curve above, disruptive value propositions always have different value curves compared to the existing solutions in the market. They raise significantly the offer on some value attributes, create new ones, and reduce or bring to zero the level of offer of some other value attributes.
The value curve can also be segmented by the business model’s stakeholders. For example, a value curve for Uber can contain segments of attributes for the riders, drivers, regulators, vehicle manufacturers, and traditional taxi drivers.
Understanding the operating model
The operating model of a business is built of three components:
- The value chain
- The partnerships
- Strategic resources and key competencies
The value chain
The value chain of a business is the set of activities that it performs to deliver its product or services to the market. Every company has a specific value chain of its own. The idea of the value chain is based on the process view of organizations in which the organization is a system made up of sub-systems, each with inputs, transformation processes, and outputs.
Inputs involve the acquisition and consumption of resources such as money, labor, materials, equipment, buildings, land, administration, and management. Inputs pass through transformational processes and activities of a chain gaining some additional value at each step and finally delivering outputs with more added value to the end-user.
Additionally when it comes to describing the value chain, one needs to remember that a firm’s value chain is part of a larger stream of activities called a value system or an industry value chain. This includes — the suppliers — that provide the inputs necessary to the firm along with their value chains, and — the distributors — that have their value chains, all the way to the customers. Suppliers and distributors are part of the value chain and are included in the value system.
Partnerships
Two trends have disrupted the traditional definition of the value chain.
- First, globalization has made it easier to find potential new partners all over the world and
- Second, new technologies have lowered transaction costs, making it cheaper to interact with potential suppliers wherever in the world.
So it has become cheaper and easier for companies to reach out to potential partners all over the place. For example at Nike, only product development, marketing, and part of the distributions are done in-house and Nike’s value chain is completely open or outsourced. Therefore, today, describing the value chain of business requires describing not only the set of activities within the boundaries of the firm but also those outside of the firm.
While thirty years ago companies were heavily integrated, today, there are many opportunities, including for innovation, in introducing partners and their technologies into the value chain. Today, more companies are partnering with competitors, NGOs, and governments and these strategic partnerships are the extended value chain of a modern company and are further driving the realms of business model innovation.
Strategic resources and key competencies
The strategic resources and key competencies of a company are the primary determinants of a firm’s strategy and its performance. As strategic resources and key competencies allow the firm to grow and perform, they should be nurtured, developed, or acquired for the operating model to deliver and remain competitive.
Strategic resources are assets owned by the firm and fall into three large categories:
- The tangible resources, such as financial resources or physical resources
- The intangible resources, such as reputation, brand, or patents
- The human resources
Strategic resources are more or less imitable in nature and the more imitable they are, the less valuable they tend to be. Here is a graph below to showcase the degree of imitability of various corporate resources.
Competencies, on the other hand, are organizational in nature, more complex, and about how things are put together and done. They are the corporate ‘know-how’.
It’s the unique combination of strategic resources and key competencies that makes a firm successful. This combination has to be non-imitable, rare, and create value that the firm can capture. For example, in the case of Disney, four strategic resources and key competencies can be identified.
- First, the characters, are strategic resources.
- Second, the brand and its emotional strengths an intangible resources.
- Third, the integrated consumer experience, that we can find in any of Disney’s many businesses, is a key competency.
- Fourth, rights management, which is a key competency.
Prerequisites to Disrupting a ‘Business Model’
Reinventing a business model means reinventing its value proposition and its operating model and as a consequence, generating a new profit equation. When attempting to disrupt a business model, we need to ask ourselves, how can one find radically new value propositions and operating models?
Some rules of thumb could be proposed when thinking of changing, reinventing, or disrupting the value propositions and operating model of a business model, however before diving into them, we need to understand some prerequisites to a business model reinvention.
- Having a customer insight. Having customer insight comes from seeing small behavioral details in customers — entering their intimacy, pains, and desires. For example, Facebook was built on the knowledge that students at Ivy League schools desired their social profile pages. LinkedIn was built on the insight that any business connection is 6 degrees of freedom away from the other, and technology can help reduce this pain in the Bay area where the tech community needs to network aggressively. In the case of Uber, Travis Kalanick made 10 calls to taxi drivers in the San Francisco Bay area, and with 3 of them willing to sign up for the app, he and his co-founder, Garrett Camp, started the company.
- Being prepared to challenge and break established industry beliefs. In all business sectors, established businesses will follow common ways of doing things. Usually, these common behaviors are former key success factors of the industry and have survived over time without ever being challenged. For example in the airline industry, for many years, all airlines had offered meals during their flights, but Ryan Air and other low-cost airlines changed this pattern. In the hotel industry, it was understood for ages that a hotel should have a reception, but Formula1 hotels replaced the reception with automated systems. In the banking industry, banks would only lend money against a guarantee of some sort — an asset or secure source of revenues —, but micro-finance institutions across the world have changed this industry constraint.
Ways to disrupt the ‘value proposition’
When thinking of ways to disrupt an established business model, we need to build an array of structured questions to think about and ideate over how one can change the value proposition. Some of the proposed questions are as follows:
- Reducing customers’ costs of transaction
- Improving the customer experience by offering a more complete solution
- Find, study, and convert the conscious non-customers
- Deliver more value — functional or emotional
- Benchmarking other segments of the market or industries
- Modifying the revenue stream
Reducing customers’ costs of transaction
Customers’ costs of the transaction include the following:
- Before the actual purchase. The cost of selecting a product/service before the actual transaction.
- The actual purchase. The cost of acquiring a product/service, or the actual monetary value of the offering.
- After the actual purchase. All the other costs incurred after the sale such as maintenance, repairs, additional necessary products/services, training, and so on.
The question that needs to be explored here is: are there one or several elements of the costs of transaction that could be reduced or changed for the customer? Most freemium business models such as online classified ads follow this disruptive approach in business model reinvention. When approaching a freemium business model, it needs to be asked: can I make my product or service free for the masses and make revenues from the high-end segments of the market?
— When attempting to reduce the costs of the transaction, ask the following questions:
- Can you strip down the offer in such a way as to lower costs and therefore your price for the customer?
- Can you offer a part of your product or services for free, to scale customers and potentially create growing demand-side network effects?
- Can you reduce the other peripheral costs incurred by clients?
Improving CX by offering a more complete solution
To enhance the overall customer experience, one needs to change the way we look at customers and find out all the hassles, complications, and problems that customers are facing along their decision journey. Customers rarely use products/services on a standalone basis and a product/service is usually combined with other products/services. Customers will generally encounter complications when using those other products/services along with your solutions and the objective here is to try to build a new value proposition by reducing the client’s hassles by simplifying the use of all products/services altogether.
This often amounts to offering a complete solution to clients that would include payment facilities, guarantee, maintenance, or all three at the same time. This was the approach that most marketplaces such as Amazon employed in their early days to increase customer adoptions.
In an ideal scenario, the new and complete solution is offered at the package price, or even lower than the added price of the different parts. Such an offer is appealing to customers who can reduce costs and refocus on their core daily activities since their hassles are reduced.
One example is Graze.com, an online marketplace that fights against the complications and boredom of customers of snacks in the UK. While snacking is widespread in the UK, available snacks such as potato chips or candy bars are often sweet and fatty and the choice is limited. Focusing on this pain, Graze combines several innovations to fight against the hassle of snack lovers.
On Graze people register on the website and choose their purchase frequency, provide a delivery address, give their taste preferences, and provide payment authorization. Graze doesn’t have to carry an inventory of all the snacks at all times as it is based on an algorithm that prepares an assortment — depending on the clients’ preferences — from a limited stock which reduces the amount of working capital. With this information, an assortment of four organic snacks arrives at regular intervals by mail providing a healthy, balanced, and different snack every time.
The assortment of snacks varies each time, which creates an element of surprise. Also, the number of calories is labeled on the box. So Graze has solved the hassle of always eating the same snack. Moreover, to avoid delivery inconveniences, the snack is packaged in a box that is thin enough to fit in a standard mailbox, so that no parcel is returned.
Therefore, Graze has found a solution for two hassles of customers: always eating the same unhealthy snack and getting their parcel at home in a convenient way.
— When attempting to improve the customer experience by offering a complete solution, ask the following questions:
- What products or services do customers use in addition to your own?
- What are the constraints or complications customers encounter when using your products or services?
- How can these complications be minimized?
Find, study, and convert the conscious non-customers
Many companies spend a significant amount of time, resources, and management attention to further improve the satisfaction of their conscious customers. However, they spend little time asking themselves: what about the conscious non-customers, those who know about our industry but refuse to use our offer or the offers of our competitors?
In most industries, there is a significant amount of conscious non-customers. For example, the wine industry in the US attracts less than 30% of the population and the highway restaurant industry in France attracts less than 20% of all drivers entering the highway. This is where it is suggested to explore understanding the reasons why people or companies do not become clients of our industry. These are customers who consciously say no thank you to your product/service.
We are not interested in the non-conscious non-customers who do not even know about us, because it will be very difficult to raise their awareness and interest in our offering.
The example that could be mentioned here once more is the Cirque du Soleil. It has designed itself to attract the conscious non-customers that would attend no other act in the industry, while also managing to attract customers from the conscious customer segment of the market.
— When attempting to find, study, and convert the non-customers, ask the following questions:
- What pushes potential conscious non-customers to refuse or ignore offers?
- Where do they go?
- What do they do?
- What are the elements of your offer that always disappoint conscious non-customers?
Deliver more value — functional or emotional
The overall idea here is to try to introduce more functionality or, on the opposite, more emotion into your offering, depending on the landscape of offers out there in the market.
For example, luxury cosmetics is an emotional industry and when you buy a perfume, you don’t only buy the product itself, but you also buy the packaging, and very often, the experience in the store. On the opposite end, in this very emotional industry, The Body Shop has decided to take out the emotion and focus on the product itself by delivering very simple packaging and buy emphasizing the quality of their products. On the other hand, if you have a very functional offer it can be interesting to introduce some emotion into it — or more generally termed as a hedonic experience.
— When attempting to deliver more value, ask the following questions:
- Is your product/service essentially functional or emotional?
- How can you add a positive emotion to it?
- Or, how can you return to its basic function by removing its emotionality?
Benchmarking other market segments or industries
Most industries are segmented into a wide range of segments. For example in the car industry, we have high-end cars — such as Porsche, Mercedes, BMW, or Tesla, — the mid-range — such as Peugeot, GM, Kia, or Renault — and the low end — such as Dacia. Benchmarking the business models of each of these companies in their segments can help ideate ways of changing business models in other segments of the same industry.
Additionally, benchmarks from other industries can help disrupt business models in other sectors. For example, the advent of on-demand logistics services via Uber’s business model has disrupted postal delivery, food delivery, laundry services, and on-demand home services.
— When attempting to benchmark other segments or industries, ask the following questions:
- What are the different segments of your business sector?
- What are the codes, rules, and propositions of other segments that could be integrated into your value proposition?
- What other business sectors or industries and their business models could inspire yours?
Align with consumer and market trends
Trend anticipation can help develop new business ideas around new value propositions. Trends such as digital technologies, societal developments, changes in the economic environment, and all those transformations are opportunities to seize. Innovative individuals and companies can anticipate, leverage, and integrate those changes into their business models and value propositions. The very early integration of those trends is often transformed into a competitive advantage for perennial companies. So you have to continuously monitor and watch trends.
For example, Jeff Bezos had anticipated the penetration of personal computers, and the internet to the general population since the 90s.
He soon found something that gave him a sense of urgency: a report forecasting rapid annual growth of the internet. “I came across the fact that web usage was growing at 2,300 percent per year. I’d never seen or heard of anything that grew that fast, and the idea of building an online bookstore with millions of titles — was very exciting to me,” Bezos revealed in a 2010 speech at Princeton, his alma-mater.
— When attempting to align with consumer and market trends, ask the following questions:
- What are the societal trends that will influence your customers?
- Your non-customers?
- What value proposition can you imagine by anticipating these trends?
Modifying the revenue stream
Generally speaking, a company’s income is a result of a price paid by the final user or by a distributor. Price is a key factor in the client’s decision to buy, so attempts to change the way this price is charged have an impact on the client’s costs and therefore their decision-making. Thus, modifying the revenue stream leads the way to very innovative value propositions. One way is to get users to pay differently. Some options include:
- Simplifying payments. The first option is to consider a subscription or a fixed fee rather than a payment per unit. This is how telecom operators have built the end consumer market: rather than asking the customer to pay per minute, they have offered him to pay a flat fee per month.
- Charging by the rate of usage. For example, in a cafe, rather than charging customers per cafe, one can charge by the hour, therefore becoming a very convenient and fun place to stay and to meet other people, transforming the whole value proposition.
- Premium pricing. You can also opt for a freemium offer in which you propose free access to your basic product or service and then charge a premium to customers eager to get more functionality.
- Charge 3rd parties. As discussed previously, Facebook and Google use this model via their freemium services and monetization via ads.
- Charge from the value-add you create for your customers. You can pay yourself from the savings or earnings you generate for your customers. Companies such as Honeywell and Schneider Electrics have launched energy performance contracts where they install devices for free and in exchange, they pay themselves on the savings that those devices generate. In this value proposition, all the risk is taken by the company producing the device which means that they guarantee performance, and in return, facility managers save on upfront investment and operational costs.
- Mix it up. Of course, you can also play with and mix some or all of the above tactics.
— When attempting to modify the revenue stream, ask the following questions:
- Could you invoice your clients differently?
- What 3rd-parties would be interested in financing all or part of your offer?
- Does your offer allow your clients to make or generate an income?
Ways to disrupt the ‘operating model’
When thinking of ways to disrupt an established business model, we need to build an array of structured questions to think over how one can change the operating model. Some of the proposed questions are as follows:
- Utilizing technology
- Modifying or changing steps in the value chain
- Eliminating or adding a step to the value chain
- Leveraging strategic resources and key competencies
- Teaming up with competitors
- Identifying and teaming up with complementors
- Expanding the resource base of the firm
Utilizing technology
While technology is not the only means of innovation, it is by far one of the most important ones, and many business models have been reinvented by the introduction of technology, in particular — but not exclusively — those linked to the Internet. Thus companies must identify or develop technologies that allow the radical modification of their operating models and the radical modification of their value propositions. Technology development is often costly but its implementation may lead to significant cost reductions. Those cost reductions should eventually make up for the investments.
— When attempting to utilize technology in your business model, ask the following questions:
- Do your competitors use a technology that you could also integrate?
- What are the existing technologies in other sectors that you could use?
Modifying or changing steps in the value chain
Companies have sometimes created new business models by simply modifying the way they perform one or several steps in the traditional value chain. One example is the Beauty Counter. This company has changed its sales and distribution process via incentivized and face-to-face salespeople who gather closely nit, cozy, sales meetings and pitch and sell beauty products.
As discussed previously, outsourcing and offshoring are other means whereby processes can be modified and help reduce production costs, further strengthening the business models’ value proposition.
— When attempting to modify or change steps in the value chain, ask the following questions:
- What are the different activities of your value chain?
- Can you change or redesign the way you bring each activity into play?
Eliminating or adding a step to the value chain
Removing or adding a step in the value chain will have a direct impact on costs and very often on the value proposition.
Eliminating a step reduces costs and therefore the offer’s price. For example, low-cost airlines don’t serve meals onboard and subsequently also save on their cleaning costs. Another example is the Beauty Bubble, a hair salon where customers’ hair is not washed and the cut is done on dry hair with a specific technique. Therefore if you don’t need water, you can set up the hair salon wherever you want, in a train station, in exhibition halls, in retail stores, and any place where there is a lot of traffic and people spend time waiting for something, hence reducing costs and increasing volume of customers served.
An example of adding steps to the value chain includes adding recycling steps — or otherwise termed the circular economy — to industrial companies that can collect their customers’ wastes and reuse them in their value chain. Such steps can help reduce production costs, further strengthening the value proposition.
— When attempting to eliminate or add a step to the value chain, ask the following questions:
- How is this step in the value chain useful?
- Can I eliminate it?
- What will the impact be in terms of cost and therefore price?
- Could you add a step in the value chain?
- What would the result be?
- Would it lower the cost?
- Would it bring value to the customer?
Leveraging strategic resources and key competencies
Companies have always found new business models by leveraging their strategic resources. It’s a classical way to develop new businesses for a corporation.
For example, a key competency of e-commerce marketplaces is fulfillment services and in this area, Amazon’s logistics are unparalleled. It has created one of the most advanced fulfillment networks in the world. Amazon has also created Fulfillment By Amazon or FBA to handle third-party sellers’ backend operations. It stores products in its fulfillment centers, picks, packs, ships, and provides customer service for these products. Third-party sellers who move goods through FBA typically differentiate their offerings with faster delivery times and gain access to a much wider customer base. Therefore Amazon’s strategic resources and key competencies become a source of competitive advantage for other SMEs.
— When attempting to leverage strategic resources and key competencies, ask the following questions:
- What are your strategic resources?
- What resources do you under-exploit?
- Could you promote them in another way?
- Do you have the know-how that could be of interest to other companies?
Teaming up with competitors
Finding partners to help a business’ value chain is an obvious statement. But we can also explore possible partnerships with some competitors or customers such as strong distributors or even suppliers. For example, Apple uses Samsung’s LEDs in its iPhones, while they are direct competitors in the smartphone market.
— When attempting to team up with competitors, ask the following questions:
- Who are your competitors?
- What are their strong points?
- What are their strategic resources?
- How are these advantages or resources complementary to yours?
- How can you associate your strengths and neutralize your weak points?
- Can you change the working relationship between yourself and your supplier, or between yourself and your customers?
Identifying and teaming up with complementors
A complementor is a company whose offer complements that of another company, thereby enabling it to propose a more attractive offer to the client. A complementor is usually identified by a company when its products/services are used by the client at the same time. For example, the bookstore chain Barnes & Noble in the U.S. realized that after buying a book, clients often went to a cafe. A short while later, the chain was the first to install cafes within its retail outlets. Those cafes were complementors to Barnes & Noble. The company expected the customer to buy more books after coffee.
So the idea here is to try to see how introducing complementors can radically change your operating model, and ultimately your value proposition.
— When attempting to identify and team up with complementors, ask the following questions:
- What products/services are used by customers before, during, and after purchasing your offer?
- Can you integrate these offers into your value proposition?
- What would be of interest to clients?
- What would be of interest to the company providing this additional offer?
Expanding the resource base of the firm
The idea here is to expand the tangible or intangible resource base of the firm far beyond the usual. For example, Airbnb crowdsourced tangible resources, in this case, rooms or apartments, from individuals. These resources were usually served by other players in the hospitality industry, namely hotels and vacation rentals. In the same manner, Uber crowdsourced its rides from underutilized and unemployed citizens.
One of the characteristics of crowdsourcing is that it generates diversity, or if you wish, decreases standardization of resources, which in return can become a desirable value attribute of the value proposition.
Intangible resources, such as brainpower, can also be crowdsourced. For example, Topcoder is a platform that organizes a contest for computer science experts. These challenges are organized on behalf of large companies, such as telcos.
Lastly, financial tangible resources are also crowdsourced, particularly by firms offering financial services. For example, Lending Club organizes through its platform peer-to-peer lent consumer credits. TransferWise and Midpoint organize peer-to-peer currency exchange and transfer, and Kiva organizes crowdfunding for microfinance institutions.
— When attempting to expand the resource base of your firm, ask the following questions:
- How can you expand the base of your tangible and intangible resources?
- What can you find by looking far from the usual base of resources?
Disruptive trends to look out for
With the recommendations above, entrepreneurs and companies that desire to innovate their business models need to stimulate their creativity and explore new potential value propositions and operating models. Exploring the above steps is an iterative process that can help foster ideas to disrupt business models. Usually, a radical change in one area will eventually lead to a radical change in another, but you’ll need to let your imagination fly and get inspired during brainstorming sessions.
Some of the recent business model disruption trends include:
- Usage vs. ownership: for example Spotify allows you to listen to music vs. owning the actual music.
- Collaborative consumption: case examples of Airbnb, Zipcar, and Uber.
- Circular economies: such as the many examples below.
- Frugal innovation: or the minimal innovation that meets the needs of the customer (otherwise known as MVP-development). Good enough products are another strong trend in business model innovation. Start with a problem and try to find a no-thrill, frugal answer.
- Freemium/premium offerings: such as Spotify, Facebook, Tinder, etc.
- Experience-oriented value propositions: If customers are not ready to pay for a product or service, they’re very often ready to pay for an experience. For example, TED conferences. Those amazing 20-minute-long conferences given by the world’s top speakers are available for free on the Internet. However, people are ready to pay several thousand dollars to attend those conferences. Again, to live the experience of actually seeing the speaker for real and networking with other participants at the conference.
- Crowd-sourcing: With over 3 billion people in the world, who have access to the internet, how can the power of this crowd be leveraged? This has given rise to business models in crowdfunding such as Kickstarter for startups or Kiva for social entrepreneurship.
- P2P business models: allow people to liaise with each other such as via Lending Club.
- Serving the low end of the pyramid: such as Grameen Bank, the bank developed by Noble Prize winner Muhammad Yunus who pioneered micro-credit, helping millions of poor people to lift themselves out of poverty by becoming entrepreneurs, or mPesa, a digital wallet and mobile bank for the under-banked population of Africa.
- The Third and Fourth Industrial Revolutions: characterized by the fusion of the digital, biological, and physical worlds, as well as the growing utilization of new technologies such as artificial intelligence, cloud computing, robotics, 3D printing, the Internet of Things, and advanced wireless technologies among others.
- Blockchain technologies and digital assets. The Internet was able to develop communication and information technologies and we were able to see an ample number of internet giants proliferate. Blockchain will help us develop digital assets such as cryptocurrencies (e.g. BitCoin) and disruptive business models will be expected in the future.
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