Using business model innovation to create a competitive moat

A moat is a deep, broad ditch, either dry or filled with water, that is dug and surrounds a castle, fortification, building or town, historically to provide it with a preliminary line of defence.

Wikipedia

Business model innovation is the type of innovation specifically focused on seeking to create a more compelling customer value proposition so that the organization can acquire more customers and repeatedly offer that value efficiently.

When business model innovation is happening, it is difficult for an organization’s competition to detect that it is happening. The innovation becomes apparent when the organization becomes successful at it. The best thing about it is it is very difficult to copy business model innovation. Hence the title of this blog post. An organization can use business model innovation to create a competitive moat thus keeping competition at bay for a little while.

The need for an agile, experimental mindset

One of the most important factors necessary to achieve successful business process innovation is the need for an agile, experimental mindset. Business model innovation is about experimenting with different variations of business models and monetizatiom strategies. Each business model idea should be supported by a set of assumptions and hypotheses. The idea is to test the business model fast, get results and iterate fast to arrive at a winning business model which you then improve on.

From Netflix’s history, we can see how they improved their business model over time. It is said that the founder of Netflix decided to start a new movie rental company after he was charged a large late fee by blockbuster. He experimented with different business models – starting with mailing DVDs to customers, suffering some losses along the way, until he arrived at his current winning business model, on demand video to customers around the globe.

Scientists use experiments to understand or reveal scientific facts. In business model innovation, the goal for the experiments is different. The experiments in business model innovation test the assumptions of the idea and reveal opportunities to the innovator so that, in time, the innovator can arrive at sustainable and successful business model.

So, unlike a scientific experiment where one might start with a theory that they want to prove, in business model experimentation you start by identifying a customer problem to solve then embark of testing various business models to test how you can get many customers to pay you to solve their problem in a better way than the current way that the problem is being solved by you or others.

Here’s an example of another company that got business model innovation right: Uber.

The customer problem: I need to get from here to there without my vehicle. I don’t want to get on a bus or train. I don’t want to wait too long for a taxi. If a taxi driver tells me he’s coming, I want to see where they are so I can determine how long my wait shall be.

Uber’s solution: work with several partner drivers to provide a service that will move you from here to there. You will be all by yourself in the taxi so it feels like you have your own personal driver. You can use the app to see where your driver is and how long he will take to get to you. This process is repeatable, sustainably for customers around the globe.

Conclusion

Business model innovation can reshape industries for the advantage of the customer. Organizations that successful shift their mindset to one of experimentation and agility towards business model innovation will be able to create that moat around their business. This mindset shift must also include delayed gratification in the financial results. Because you are experimenting, you must expect some failures along the way. On the other hand, shareholders expect to see value in the short term. The best plan is to continue to expect and leverage on the short term (immediate) value from your existing business models as you experiment with new ones. Then hopefully when you arrive at a new successful business model, the financial benefits will propel your bottom line to new heights.

There are several other considerations to make the business model innovation experiments worth the time and effort. These considerations such as having the right talent, measuring the outcome of experiments to determine whether or not to continue experimenting, etc. These considerations will be covered in future posts.