Why is it that some companies thrive while others fail despite having great ideas?
The answer to this lies in their business model, which tells us about how a company creates and captures value in the market. A business model should narrate the story of a company: who its target customers are? what are they looking for? and how the company delivers it profitably?
“Innovation distinguishes between a leader and a follower.”
- Steve Jobs
Let us start by clarifying a common confusion: business model vs. strategy vs. tactics.
Your business model is the framework of how everything fits together, strategy is the roadmap for competing effectively within that framework and tactics are the short-term actions which you take along the way.
Consider Apple's business model revolves around premium devices and a seamless ecosystem. Its strategy? Staying ahead with innovation and design. Its tactics? Launching special editions, seasonal discounts, or marketing campaigns.
Understanding these difference helps a company stay aligned and avoid destructive competition which wastes energy and resources.
A business model also evolves over time and most of these evolutions pass through three stages:
1. Creation: This is the phase in which we discover gaps customer needs. Like, the founders of Airbnb realizing people wanted cheaper and more private travel experiences than what hotels offer.
2. Sustaining Innovation: Once the customers is on board, our focus shifts towards scaling and improving theofferings. A classic example for this would be Netflix constantly refining its recommendation engine and content library according to the tastes and preferences of their customers to keep them engaged.
3. Efficiency in Innovation: Eventually, the target is to optimize operations to maximize returns. Like, Amazon streamlining its supply chain and using automation to keep costs low without compromising on quality.
All parts of a business model, be it value proposition, resources, processes or profit formula are interconnected. As the company grows over years, these connections become more rigid, thus reducing the flexibility of the model. This is the reason why forcing new ideas into an old business unit often fails.
It is like Blockbuster trying to do DVD by mail. A classic example of idea fighting against existing priorities.
To tackle this problem is where customer-centric innovation and autonomy come in. New ventures within a company need the freedom to experiment without being tied up to the parent company’s old styles. Reliance Jio, for example, was launched as a separate unit from the traditional energy businesses of Reliance Industries. Being free from the constraints of the oil and gas legacy of Reliance Industries, Jio redefined connectivity in India and became a textbook example of a business model innovation done right.
Business models may come in different varieties, but its ideal usability is derived by how creatively a companies are able to structure them to solve real problems. Some models are everywhere, like subscriptions or freemiums, while others are a bit more innovative, such as:
1. Marketplace Models: Companies like Urban Company and Meesho connect service professionals and resellers with customers, creating scalable platforms that are empowering small businesses and entrepreneurs.
2. Sharing Economy Models: Platforms such as Zoom car and Rentomojo allow individuals to rent vehicles and furniture, promoting a culture of access over ownership and catering to the evolving needs of urban consumers.
3. Outcome-Based Models: Razorpay offers performance-based pricing for its payment solutions, aligning its success with that of its clients and demonstrating a commitment to mutual growth.
-Anand Mahindra
Business models are not supposed to be rigid, they must evolve through experimentation, feedback, and adaptation.
So next time you use an app to shop online or book a ride, take a second and think - What is the story behind this company? That story is its business model, it is the secret ingredient that decides if it becomes the next unicorn or just another cautionary tale.
